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The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.
The Fisher equation plays a key role in the Fisher hypothesis, which asserts that the real interest rate is unaffected by monetary policy and hence unaffected by the expected inflation rate. With a fixed real interest rate, a given percent change in the expected inflation rate will, according to the equation, necessarily be met with an equal ...
The real interest rate measures the growth in real value of the loan plus interest, taking inflation into account. The repayment of principal plus interest is measured in real terms compared against the buying power of the amount at the time it was borrowed, lent, deposited or invested.
For example, if the inflation rate is 5%, on a one-year loan of $1,000 with an 8% nominal interest rate the real interest rate would be 8% minus 5% or 3%. The real interest rate will usually be ...
Top 10 Highest Real Interest Rates in the World. The real interest rate is the lending interest rate adjusted for inflation, as measured by an index called the gross domestic product deflator.
In the case where the growing quantity is a financial asset, is a nominal interest rate and is the corresponding real interest rate; the first-order approximation = is known as the Fisher equation. [1]