ECON 1200 1st Edition Lecture 21- Nominal Interest Rate—The stated interest rate on a loan o The return of lending and saving and the cost of borrowing before an adjustment forinflationo If the nominal interest rate on a loan is 10% per year, and you borrow $100 for 1 year, then you will owe $110 at the end of the yearo The rate at which the number of dollars in a savings account increases over timeo If the nominal interest rate on a savings account is 10% per year and you keep $100 in the savings account for 1 year will be $110 o What is advertised by financial institutions and what is usually reported by the news- Real Interest Rate—(The nominal interest rate- the inflation rate)o The return to lending/saving and the cost of borrowing after an adjustment for inflation, which makes it a better measure than the nominal interest rate  If the inflation rate is 4% per year, then the real interest rate on the loan is (10%-4%=6%) The rate at which the purchasing power of a savings account changes over time- If the inflation rate is 4% per year, then the real interest rate on the savings account is 6% per year, so the account balance at the end of 1 year of $110 will buy what $106 buys today What matters is not the # of dollars, but what those dollars represent in terms of goods and services (purchasing power)- Most people believe that inflation is bad because it reduces the purchasing power of incomeo However, the higher prices paid by buyers are exactly offset by the higher incomes received by sellers, so the average person’s purchasing power is not affected by inflation in the long run- Nom. Interest Rate= (Real IR+ Inflation)- Real Interest Rate= (Nom. IR- Inflation)- Inflation= (Nom IR- Real IR)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a