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If the real interest rate is 6 percent and the price level is falling by a rate of 3 percent. The nominal interest rate is 6%.
What is the nominal interest rate?
- The interest rate before inflation adjustment (as opposed to the real interest rate); or the interest rate "as reported" without accounting for the full impact of compounding (also referred to as the nominal annual rate).
- If the frequency of compounding (for example, a month) differs from the fundamental time unit in which the nominal rate is expressed, the interest rate is said to be nominal (normally a year).
What is interest?
- The amount of interest due each period expressed as a percentage of the amount lent, deposited, or borrowed is known as an interest rate (called the principal sum).
- The total interest on a loaned or borrowed sum is determined by the principal amount, the interest rate, the frequency of compounding, and the period the loan, deposit, or borrowing took place.
- The interest rate over a year is known as the annual interest rate.
- Other interest rates are applicable over shorter time frames, such as a day or a month, but they are typically annualized.
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