ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The interest rate is the amount a lender charges a borrower and is a percentage of the principal-the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).

Detailed explanation-2: -Nominal Interest Rate It is the stated interest rate paid or earned to the lender or by investor. So, if as a borrower, you get a loan of $100 at a rate of 6%, you can expect to pay $6 in interest. The rate has been marked up to take account of inflation. Short-term nominal interest rates are set by central banks.

Detailed explanation-3: -Real interest rates can be negative, but nominal interest rates cannot. Real interest rates are negative when the rate of inflation is higher than the nominal interest rate. Nominal interest rates cannot be negative because if banks charged a negative nominal interest rate, they would be paying you to borrow money!

Detailed explanation-4: -The nominal interest rate is often used in banks to describe interest on different loans and in the investment field. For example, if the nominal rate on a loan is 5%, you can expect to pay $50 of interest for $1, 000 borrowed. At the year’s end, you’ll pay $1, 050.