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What is the difference between nominal and real interest rates?

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Joshua Stredder
Joshua StredderLv10
29 Oct 2020
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Related questions

Nominal and real interest rates: 

a. Explain the difference between real and nominal interest rates. 

b. Which of these two interest rates is relevant for investment and consumption decisions and why? 

c. How is the real interest rate calculated ex-post? How is the real interest rate calculated ex-ante? 

1. Nominal and real interest rates: 

a. Explain the difference between real and nominal interest rates. 

b. Which of these two interest rates is relevant for investment and consumption decisions and why? 

c. How is the real interest rate calculated ex-post? How is the real interest rate calculated ex-ante? 

 

2. Fisher parity

a. Write down the approximation formula of the Fisher parity.

b. What is the real interest rate if the nominal interest rate is 6% and the expected inflation rate is 1%?

c. How is the real interest rate affected if the expected inflation increases while the nominal interest rate remains constant?

d. Given that the nominal interest rate can’t be negative ("zero lower bound"), what is the lowest value the real interest rate can be?

1. Consider the relationship between interest rates and inflation.

A. Explain the difference between real and nominal interest rates. (9 points)

B. If the Fed takes actions that will change interest rates, how is this likely to affect inflation? (9 points)

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