ECONOMICS
REAL VS NOMINAL
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The real price of borrowing money, minus the rate of inflation
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The amount of profit banks make after they control for inflation on the nominal interest.
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Ex. A bank charges a 5% nominal interest rate. They expect 2% inflation, so the RIR is 3%.
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Check here if you don’t understand these.
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Detailed explanation-1: -If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent.
Detailed explanation-2: -The real interest rate measures the percentage increase in purchasing power the lender receives when the borrower repays the loan with interest..
Detailed explanation-3: -A “real interest rate” is an interest rate that has been adjusted for inflation. To calculate a real interest rate, you subtract the inflation rate from the nominal interest rate. In mathematical terms we would phrase it this way: The real interest rate equals the nominal interest rate minus the inflation rate.
Detailed explanation-4: -According to the Fisher effect, if inflation rises then the nominal interest rate rises. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%. Inflation induces people to spend more resources maintaining lower money holdings.