Principles of Economics- Mankiw (5th) 507

Principles of Economics- Mankiw (5th) 507 - CHAPTER 23...

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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 23-3 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.

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