Nominal vs. Real Interest Rates and Economic Variables

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Flashcards covering the definitions and relationships between nominal and real interest rates, inflation, and correcting economic variables.

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5 Terms

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Nominal Interest Rate

Interest rate as usually reported, without a correction for the effects of inflation.

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Real Interest Rate

Interest rate corrected for the effects of inflation; calculated as Nominal interest rate - Inflation rate.

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Nominal interest rate exceeds the real interest rate

U.S. economy has experienced rising consumer prices every year

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Correcting Economic Variables

Amount in today's dollars = (Price level today / Price level in year T) * Amount in year T dollars.

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Deflation

Real interest rate would exceed the nominal interest rate during periods of deflation.