How to find real interest rate

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AP Macroeconomics › How to find real interest rate

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The real interest rate can be approximated by the Fisher equation:

What is the exact formula for the real interest rate?

$\frac{1+nominal}{1+inflation}-1=real$

The Fisher equation always gives the exact real interest rate.

$\frac{nominal}{inflation}-1=real$

$\frac{nominal}{inflation}=real$

$\frac{nominal-inflation}{1-nominal}=real$

Explanation

The real interest rate is defined as the nominal appreciated value of assets divided by the new price level of the assets. The nominal appreciated value is simply , while the new price level is equal to . This gives the real appreciated value of assets. We then subtract 1 to get the real interest rate.

Example: (according to the Fisher equation)

$\frac{1+.1}{1+.05}-1=.0476$

The Fisher equation comes close, but is not actually correct.

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