Unit 2- Interest Rate

Real Interest Rate
(Adjusted for Inflation) A % increase in purchasing power, the lender receives when the borrower repays the loan with interest.
Formula: Nominal Interest Rate (-) Inflation

• Unanticipated Inflation

Nominal Interest Rate

(Not adjusted for Inflation) The % increase in dollars you pay the lender for the use of dollars that you borrowed. AKA Interest.

Formula: Real Rate of Interest (+) Inflation Premium

• Anticipated Inflation

Hurt by Inflation:

1. Savers 
2. Lenders/ Creditors 
3. Those Who are on a Fixed Income

Helped by Inflation

1. Debtors 

Cost Of Living Adjustment ( C.O.L.A. )

*Automatic wage increases when inflation occurs*