Hello,

I am confused by this example of the fisher effect equation from my finance textbook. It seems to me that you would solve algebraically to find the real rate of interest, subtracting the anticipated rate of inflation from the nominal rate of inflation and then solving for X. If that is the case though, where did the 1 in "1.05 x real rate of inflation" come from? Perhaps I am not getting something here.

Substituting into equation (2-3) using a nominal rate of 11.3 percent and an inflation rate of 5 percent, we can calculate the real rate of interest as follows: real rate of interest Nominal or quoted rate of interest + anticipated + product of the real rate of rate of interest and the anticipated inflation rate of inflation + 0.05 + 0.05 x real rate of interest = 0.113 0.063 0.063/1.05 real rate of interest 1.05 x real rate of interest real rate of interest where did 1 come from? Solving for the real rate of interest: Real rate of interest = 0.06 = 6%