Money Interest Rate Formula

Money Interest Rate Formula

Money Interest Rate formula has been given below. Money Interest rate formula has been explained with an example

(1+m) = (1+i)(1+r)

By Re arranging the formula

(m) = (1+i)(1+r)-1

Where;

m=money rate

i= inflation rate

r= real rate

Money Interest Rate Formula Example

Inflation Rate = 5%

Real Rate required by Investor = 4 %

Calculate Money Rate=?

Solution

(1+m) = (1+i)(1+r)

Money rate = (1.5%)(1.4%)-1

= (1.092)-1

=9.2%

Money Rate Quick Calculation

Money interest rate can be quickly calculated by adding the real interest rate and inflation rate. However, for more accurate calculation the fished effect formula (as shown above) is used. In above example, the quick calculation gives an answer of 9% (4%+ 5%), while fisher effect formula given an answer of 9.2%.

Significance of Money Rate

In real life money rate concept is used, because money rate is offered after considering the inflation in the economy. All financial instruments are offered at money rate of interest.

Characteristics of Money Rate

1.    Money Rate is inclusive of inflation rate

2.    Money rate is used in financial market for offering different products.

3.    Money Rate is simple to understand and apply

4.    money interest rate or nominal interest rate is an effective tool for controlling inflation

Other name of Money Rate of interest

Other name of money rate of interest is nominal rate of interest. These both terms can be used interchangeably.

Money Interest Rate and Inflation

In case of high inflation rate, the interest rates are kept high by the central bank to reduce the money supply for controlling inflation in the economy. Therefore money interest rate is an effective inflation controlling tool.

Money Interest Rate and recession

Money interest rate can also be used to end the recession (boosting economic activity). Interest rate can be lowered to boost the economy activity in the economy. At lower bank interest rate people would take the loan and invest them in market.