Financial Sector - Nominal vs Real Interest Rates

These flashcards cover key vocabulary and concepts related to the financial sector, specifically focusing on nominal and real interest rates, inflation, and their implications.

Nominal Interest Rate

The percentage increase in money that the borrower pays, not adjusted for inflation.

Real Interest Rate

The percentage increase in purchasing power that a borrower pays, adjusted for inflation.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Formula for Real Interest Rate

Real Interest Rate = Nominal Interest Rate - Expected Inflation.

Formula for Nominal Interest Rate

Nominal Interest Rate = Real Interest Rate + Expected Inflation.

Impact of Negative Real Interest Rate

Indicates that inflation is higher than nominal interest rate, resulting in a decrease in purchasing power.

Financial Crisis (2008)

A significant financial downturn characterized by the collapse of financial institutions and bailouts, also referred to as a period of systemic risk.