Real and Nominal Interest
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Sophia puts money in the bank and earns a 5% nominal interest rate. If the inflation rate is 2%, then after one year...
Sophia will have 5% more money, which will produce 3% more goods
As long as prices are rising over time then,
the nominal interest rate exceeds the real interest rate
If the nominal interest rate is 8% and the rate of inflation is 3%, then the real interest rate is...
5%
