Real Interest Rate VS Nominal Interest Rate
·
Nominal Interest Rate: Not adjusted for inflation. The Percentage
increase in money you pay the lender for the use of money that you borrowed.
NIR = RIR + Inflation Premium
·
Real Interest Rate: Adjusted for Inflation. The
percentage increase in the purchasing power the lender receives when the
borrower repays the loan with interest (Unanticipated Inflation)
RIR = NIR – Inflation
Unanticipated Inflation
·
Hurt by Inflation:
o
Savers
o
Lenders/Creditors
o
Those who are on a fixed income (Elderly,
Welfare, Pension)
·
Helped by Inflation:
o
Debtors
C.O.L.A. (Cost of Living
Adjustment):
Automatic wage increases when inflation occurs.
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