CHAPTER 23MEASURING THE COST OF LIVING523rate was 4 percent, then the amount of goods she can buy has increased by only6 percent. And if the inflation rate was 15 percent, then the price of goods hasincreased proportionately more than the number of dollars in her account. In thatcase, Sally’s purchasing power has actually fallen by 5 percent.The interest rate that the bank pays is called the nominal interest rate,and theinterest rate corrected for inflation is called thereal interest rate.We can write therelationship among the nominal interest rate, the real interest rate, and inflation asfollows:Real interest rate Nominal interest rateInflation rate.The real interest rate is the difference between the nominal interest rate and therate of inflation. The nominal interest rate tells you how fast the number of dollarsin your bank account rises over time. The real interest rate tells you how fast thepurchasing power of your bank account rises over time.
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