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The nominal interest rate, also known as an annual percentage rate or APR, is the periodic interest rate multiplied by the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded). [2]
The nominal interest rate is the accounting interest rate – the percentage by which the amount of dollars (or other currency) owed by a borrower to a lender grows over time, while the real interest rate is the percentage by which the real purchasing power of the loan grows over time. In other words, the real interest rate is the nominal ...
The Fisher equation plays a key role in the Fisher hypothesis, which asserts that the real interest rate is unaffected by monetary policy and hence unaffected by the expected inflation rate. With a fixed real interest rate, a given percent change in the expected inflation rate will, according to the equation, necessarily be met with an equal ...
The nominal interest earned on a deposit or paid on a loan is the balance times the nominal interest rate. For instance, a bank may advertise one-year $10,000 personal loans available at a 4% ...
For example, if the inflation rate is 5%, on a one-year loan of $1,000 with an 8% nominal interest rate the real interest rate would be 8% minus 5% or 3%. The real interest rate will usually be ...
The nominal interest rate is the rate of interest with no adjustment for inflation. For example, suppose someone deposits $100 with a bank for one year, and they receive interest of $10 (before tax), so at the end of the year, their balance is $110 (before tax).
A social optimum occurs when the nominal rate is zero (or deflation is at a rate equal to the real interest rate), so that the marginal social benefit and marginal social cost of holding money are equalized at zero. Thus, the Friedman rule is designed to remove an inefficiency, and by doing so, raise the mean of output.
In this case, the LM curve becomes horizontal at the interest rate level chosen by the central bank, allowing a simpler kind of dynamics. Also, the interest rate level measured along the vertical axis may be interpreted as either the nominal or the real interest rate, in the latter case allowing inflation to enter the IS–LM model in a simple way.