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CHAPTER 23
MEASURING THE COST OF LIVING
523
rate was 4 percent, then the amount of goods she can buy has increased by only
6 percent. And if the inflation rate was 15 percent, then the price of goods has
increased proportionately more than the number of dollars in her account. In that
case, Sally’s purchasing power has actually fallen by 5 percent.
The interest rate that the bank pays is called the
nominal interest rate,
and the
interest rate corrected for inflation is called the
real interest rate.
We can write the
relationship among the nominal interest rate, the real interest rate, and inflation as
follows:
Real interest rate
±
Nominal interest rate
²
Inflation rate.
The real interest rate is the difference between the nominal interest rate and the
rate of inflation. The nominal interest rate tells you how fast the number of dollars
in your bank account rises over time. The real interest rate tells you how fast the
purchasing power of your bank account rises over time.
Figure 233 shows real and nominal interest rates since 1965. The nominal
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
 Spring '10
 abijian

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