AP MacroeconomicsFinancial Sector & Loanable Funds
Fisher Equation
The relationship between the nominal interest rate, real interest rate, and expected inflation.
It states that the nominal interest rate equals the real interest rate plus expected inflation. This equation explains how lenders demand higher nominal rates when inflation expectations rise to preserve real returns. It is foundational for understanding interest rate dynamics.
Formula / Example
Nominal Interest Rate = Real Interest Rate + Expected Inflation
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Study module
The Loanable Funds Market →
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