Interest Rates
- Real interest rates are measured as the difference between nominal interest rates and the rate of inflation.
- The expected real interest rate is the nominal interest rate minus the inflation rate expected over the term of the loan.
- The realized (ex post) real interest rate has the actual inflation rate subtracted from the nominal interest rate.
The relationship above is approximate only. The actual relationship is: (1+IRN)=(1+IRR)+(1+I), where:
- IRN is the nominal interest rate,
- IRR is the real interest rate, and
- I is the inflation rate
Read more about this topic: Real Versus Nominal Value (economics)
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