MEA-3.B—a. Define the nominal and real interest rate. b. Explain the relationship between changes in nominal interest rates, expected…

a. Define the nominal and real interest rate. b. Explain the relationship between changes in nominal interest rates, expected inflation, and real interest rates. c. Calculate the nominal and real interest rate.

• A nominal interest rate is the rate of interest paid for a loan, unadjusted for inflation.
• Lenders and borrowers establish nominal interest rates as the sum of their expected real interest rate and expected inflation.
• A real interest rate can be calculated in hindsight by subtracting the actual inflation rate from the nominal interest rate.
• Enduring understanding MEA-3: Money makes it possible to compare the value of goods and services, and interest rates provide a measure of the price of money that is borrowed or saved.