Real Interest Rate
Definition
The real interest rate is the nominal interest rate adjusted for inflation. It represents the purchasing power of borrowed or invested money after accounting for changes in prices over time.
Analogy
Think of the real interest rate as a slice of pizza that you can buy with your borrowed or invested money. If inflation is high (like extra cheese), even if you have a high nominal interest rate (a big pizza), your purchasing power may be low because prices have risen significantly.
Related terms
Nominal Interest Rate: The nominal interest rate is the stated or advertised interest rate without adjusting it for inflation.
Inflation Rate: The inflation rate measures how fast prices are rising over time.
Fisher Effect: This term describes how changes in expected inflation impact nominal and real interest rates.
"Real Interest Rate" appears in:
Study guides (4)
Additional resources (1)
Practice Questions (17)
When the inflation rate exceeds the expected inflation rate, what happens to the real interest rate?
If the real interest rate is 4% and the inflation rate is 2%, what is the nominal interest rate?
When the inflation rate is lower than the expected inflation rate, what happens to the real interest rate?
What does the real interest rate help investors estimate?
If the inflation rate is higher than the nominal interest rate, what can happen to the real interest rate?
What's the effect of an increase in the supply of loanable funds on the real interest rate?
What's the effect of an increase in the demand for loanable funds on the real interest rate?
What's the effect of a decrease in the supply of loanable funds on the real interest rate?
What's the effect of a decrease in the demand for loanable funds on the real interest rate?
What's the relationship between the real interest rate and the quantity of loanable funds supplied?
What's the relationship between the real interest rate and the quantity of loanable funds demanded?
What happens to the real interest rate and the quantity of loanable funds at equilibrium?
What is the likely impact on a country's currency when its real interest rate is higher than that of other countries?
What tends to happen to a country's currency when its real interest rate is lower than that of other countries?
How does a higher real interest rate in one country compared to another affect the country's currency?
What tends to occur to a country's currency when its real interest rate is lower compared to that of other countries?
How does a higher real interest rate in one country compared to another affect the country's currency value?
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