Interest Rates: Nominal v. Real
Nominal
- Not adjusted for inflation
- % increase in money paid to lender for use of borrowed money
- Real Rate of Interest + Inflation Premium
Real
- Adjusted for inflation
- % increase in purchase power lender receives when borrower repays loan with interest.
- Nominal Interest Rate - Inflation
Effects of Inflation
Hurt by Inflation
- Fixed income
- Savers
- Lenders/creditors
Helped by Inflation
- Borrowers
COLA - Cost of living adjustment - Wages increase when inflation occurs
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