Nominal Interest Rate
The market interest rate before inflation is taken into account.
Real Interest Rate
The interest rate which has been adjusted for inflation.
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Paywall
(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.
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Questions
Recap questions
1 of 5
Two borrowers both take loans at a 5% nominal interest rate. Borrower A faces 7% inflation, while Borrower B faces 3% inflation. Which borrower benefits more and why?
What is direct provision of goods and services?
Note
Before we dive into the specifics of interest rates, let's clarify the basic concept of interest:
Think of interest as a "rental fee" for money. Just like you pay rent to live in a house, you pay interest to use someone else's money.
AnalogyImagine lending your friend €100. If they agree to pay you back €110 after a year, that extra €10 is like a thank-you gift for letting them use your money. In this case, the interest rate would be 10%.
DefinitionInterest RateThe proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan amount.
This foundational understanding will help us as we explore the differences between nominal and real interest rates.
