Which one of the following is the correct expression for the Fisher equation, where n = the annual nominal interest rate r = the annual real interest rate P = the expected annual inflation rate
(1 + n) = (1 + r) (1 + P)
The Fisher equation links the nominal interest rate actually quoted in the market to the real return an investor earns and the inflation expected over the period.
The logic is one of compounding. An investor lending money wants to be compensated twice over: first for the loss of purchasing power caused by inflation, and second for genuinely giving up the use of the funds. The nominal return must therefore cover both, and because the two effects multiply rather than merely add, the exact relationship is (1 + n) = (1 + r)(1 + P). This is option (A).
Expanding the right-hand side gives 1 + r + P + rP, so n = r + P + rP. The familiar approximation n ≈ r + P simply drops the small cross-product term rP, which is acceptable when both rates are low but not exact.
The other options rearrange the terms wrongly. Options (B) and (C) place the real rate and the inflation rate respectively on the left, which would make the nominal rate a component of the real rate or of inflation - the reverse of the causal structure. Option (D) is not a form of the Fisher equation at all, since it squares a term and uses a minus sign.
Hence the correct expression is (1 + n) = (1 + r)(1 + P).
Similar Questions
If the rate of return on investment opportunity is likely to be 15 percent, the opportunity cost of capital is 10 percent, the earnings per share is ₹ 10 and if the pay-out ratio is 40 percent, the price of share according to Walter Model will be :
If the total cash requirement of a company is ₹ 2 crore next year, the opportunity cost of funds is 15 percent per annum and the cost of conversion from securities to cash per transaction is ₹ 150, the optimum cash balance as per Baumol’s Model will be :
Let the face value of commercial paper be denoted by F.V., net amount realised from the commercial paper be NAR, maturity period of commercial paper be MP. The effective pre - tax cost of commercial paper shall be :
The average spread between the cost of goods sold and the sales revenue is indicated by :
EBIT - EPS indifference point is the level of :
The Gaia hypothesis was propounded in 1999 by :
Capital structure of a business unit consists of :
In computation of the weighted average cost of capital, weights are assigned as per :
In the formula \(k_d = \frac{I}{B_0}\) used for computation of the cost of debt capital, \(B_0\) denotes as which one of the following ?
The cost arising out of the failure of the customers to meet their obligations when payment on credit sales become due after the expiry of the credit period, may be attributed to which one of the following ?
Important Questions from Miscellaneous
Which gas shields the surface of the earth from ultraviolet radiation from the sun?
Which event is marked as an Intangible Cultural Heritage of Humanity by UNESCO?
Who has been conferred with the rank of the Commander of the Order of the British Empire in 2018?
Who directead the film ‘Bhuvan Shome’?
The book “In my mother’s house” is written by _______
