3.5.4—Real and nominal interest rates

The nominal interest rate is the stated rate; the real rate adjusts for inflation and approximates purchasing-power cost.

For moderate rates, real rate ≈ nominal rate minus inflation; expectations matter for decisions.

State whether ex ante or ex post and compare rates consistently.

A 6% nominal loan with 4% inflation has an approximate real cost of 2%.

A high nominal rate can coexist with a low or negative real rate.