Overview
Real interest rates and inflation are crucial concepts in economics that help us understand the cost of borrowing and the value of money over time. Real interest rates provide a clearer picture of the actual cost of loans by adjusting nominal rates for inflation. This adjustment is essential for mak...
Key Terms
Example: If the nominal interest rate is 5% and inflation is 2%, the real interest rate is 3%.
Example: A bank offers a nominal interest rate of 4% on savings.
Example: If prices rise from $100 to $105, the inflation rate is 5%.
Example: Inflation decreases purchasing power, meaning you can buy less with the same amount of money.
Example: The Federal Reserve is the central bank of the United States.
Example: During a recession, deflation may occur as demand for goods falls.