Macroeconomic Essentials by Peter E. Kennedy & Jay Prag

Author:Peter E. Kennedy & Jay Prag [Kennedy, Peter E. & Prag, Jay]
Language: eng
Format: epub
Published: 2017-08-25T00:00:00+00:00

The nominal interest rate includes the inflation premium; it is the interest rate observed on the markets, discussed in the media, paid on mortgages, and earned on savings accounts. The real interest rate is the nominal rate less the expected rate of inflation:

Real rate = Nominal rate – Expected inflation rate.

Sample Exam Question 10.5

Suppose that the real rate of interest is 3 percent, the real rate of growth is 2 percent, and the rate of growth of the money supply is 6 percent. What is the nominal interest rate?

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