The Fisher Equation is a fundamental concept in economics that describes the relationship between nominal interest rates, real interest rates, and inflation. It is expressed mathematically as:
Where:
This equation highlights that the nominal interest rate is not just a reflection of the real return on investment but also accounts for the expected inflation. Essentially, it implies that if inflation rises, nominal interest rates must also increase to maintain the same real interest rate. Understanding this relationship is crucial for investors and policymakers to make informed decisions regarding savings, investments, and monetary policy.
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