Nominal vs. Real Interest Rates and Economic Variables

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

Nominal Interest Rate

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

Real Interest Rate

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

Nominal interest rate exceeds the real interest rate

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

Correcting Economic Variables

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

Deflation

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