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AP Macroeconomics 4.2: Nominal and Real Interest Rates

Distinguish nominal and real interest rates, use expected and actual inflation, and calculate the real rate for borrowers and lenders.

Syllabus
Effective Fall 2025
Course
AP Macroeconomics

Covered syllabus points

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

4.2 Nominal v. Real Interest Rates question 1

[Maximum number: 3]

Inflation and expected inflation are important determinants of economic activity.

Question (a)

(a)

Given the increase in the expected rate of inflation from part (b),

[ 2 ]

Question (i)

(i)

will the nominal interest rate on new loans increase, decrease, or remain unchanged?

[ 1 ]

Question (ii)

(ii)

will the real interest rate on new loans increase, decrease, or remain unchanged?

[ 1 ]

Question (b)

(b)

Assume that the nominal interest rate is 8 percent. Borrowers and lenders expect the rate of inflation to be 3 percent, and the growth rate of real gross domestic product is 4 percent. Calculate the real interest rate.

[ 1 ]
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