Answer to Question #118664 in Macroeconomics for Karan Bhanot

Question

Is real interest rate always lower than nominal interest rate ? Explain properly within 100 words

Answer 1

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. A nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

To calculate the real interest rate, you need to subtract the actual or expected rate of inflation from the nominal interest rate. So real interest rate always lower than nominal interest rate