AP Macroeconomics / Unit 4: Financial Sector
4.2 Nominal vs. Real Interest Rates
Notes
$$\text{real rate}\approx\text{nominal rate}-\text{inflation}$$
- Lenders lose when actual inflation is higher than expected.
Practice
Nominal rate 7%, inflation 3%. Real rate:
$7-3$.
If inflation is higher than expected, who gains?
Real cost of the loan fell.
A real interest rate can be negative when:
Inflation outpaces interest.
Ready for more? Take the Unit 4 test.