The Fisher equation is as follows:

r = i -

The real interest rate is determined by the nominal interest rate (i) minus inflation ().

For example: You put $500 in a savings account at the bank and earn 5% interest on the $500 over one year. After a year, the bank pays you $25 interest for the $500 deposit (5% of $500).

Unfortunately, over the course of that year, inflation was also 5%. This means that your $525 is now worth less today because of inflation. What was the real interest rate? What is the real value of the $500 after one year? What do you earn from the bank after one year?