SEMESTER - II
4. Explain the difference between nominal and real interest rates.
A ANS:
|
NOMINAL INTEREST RATES |
REAL INTEREST RATES |
|
Meaning |
|
|
The nominal interest rate is the least difficult rate
that doesn’t take into consideration economic inflation. |
The real rates are accustomed to considering the monetary
waves or the financial ripples brought about by economic inflation. |
|
Also Known as |
|
|
The other name for the nominal interest rate is the
coupon rate. |
The real interest rate is additionally called an actual
interest rate. |
|
Adjustment |
|
|
The nominal interest rate can never be a negative
measure. |
The real interest rate can be a negative measure assuming
that specific circumstances prevail. |
|
Formula |
|
|
Nominal Rate = Real Rate + Inflation |
Real Rate = Nominal Rate – Inflation |
|
Economic Inflation |
|
|
The nominal interest rate is fixed without the impact of
economic inflation. |
The rate of real interest is fixed in view of levels of
economic inflation. |
|
Stability |
|
|
Strength and stability are the elements of the nominal
interest rate. |
Adaptability and flexibility are the components of the
real interest rate. |
|
Adjustment |
|
|
The nominal interest rate can never be a negative
measure. |
The real interest rate can be a negative measure assuming
that specific circumstances prevail. |
|
Amount |
|
|
Generally, the interest is high in nominal interest rate. |
Typically, the interest is low in the real interest rate. |
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