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Wize AP Macroeconomics Textbook > Measuring the Cost of Living and Inflation

Real and Nominal Interest

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Real and Nominal Interest




Real Interest= Nominal Interest -  Expected Inflation \boxed{\text{Real\ Interest} =\text {\ Nominal\ Interest\ - \text\ Expected\ Inflation }}



  • Real interest looks at how much lenders really earn once we take inflation into consideration.
  • If expected inflation increases, real interest rate will
    decrease
    , which is
    bad
    for lenders and
    good
    for borrowers.
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Example: Real and Nominal Interest

If inflation is higher than anticipated which of the following is most likely to be true
A) it will be easier to get a new mortgage.
B) income will be more even distributed than before.
C) it will be easier to repay your student loans.
D) forecasting the future inflation rate will become easier.
E) the money in your piggy bank will increase in value.
C.
If inflation increases it means real interest decreases which is good for borrowers (like people paying back student loans) because they are the ones that have to pay interest.

Practice: Real Interest and CPI

Which of the following is (are) CORRECT?