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“Examples include governments with high debt levels and borrowers on fixed repayment plans. Think of someone with a 30-year fixed rate mortgage with a set payment each month.”
The nominal interest rate is a simple way of expressing the cost of a loan or the return on a deposit. The real interest rate accounts for the effect of inflation on the purchasing power of ...
Since the inflation rate over the course of a loan is not known initially, volatility in inflation represents a risk to both the lender and the borrower. In the case of contracts stated in terms of the nominal interest rate, the real interest rate is known only at the end of the period of the loan, based on the realized inflation rate; this is ...
Even if you manage to score a 1.5% APY with a no-fee online savings account, your money is still losing purchasing power to the tune of about 7% per year with inflation at current levels.
Banks have a legal obligation to keep a certain fraction of bank deposit money on-hand at all times. [32] In order to raise additional money to cover excess spending, Congress increases the size of the National Debt by issuing securities typically in the form of a Treasury Bond [33] (see United States Treasury security). It offers the Treasury ...
If the true value of the project is only known to the borrower, the lender must incur a monitoring or auditing cost in order to reveal the true project returns and receive full re-payment. The size of the external finance premium that results from these market frictions may be affected by monetary policy actions.
That is, the rule produces a relatively high real interest rate (a "tight" monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low real interest rate ("easy" monetary policy) in the opposite situation, to stimulate output.
News about inflation has been everywhere over the past few years. But even if you haven't been watching TV or reading the financial press, you've no doubt felt some pain in your wallet as prices ...