Measuring the price level and inflation - Inflation affects Interest Rates

5 important questions on Measuring the price level and inflation - Inflation affects Interest Rates

What is a nominal interest rate(i) ?

It's the annual percentage increase in the dollar value of an asset, like advertised rates.

What formula calculates the real interest rate (r) ?

The formula is r = i – π, with π representing inflation.

Why does inflation matter for borrowers and lenders?

Anticipated inflation helps banks and borrowers plan, while unexpected inflation leads to unfair outcomes.
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What happens to borrowers when inflation is unexpected?

They repay loans with money that is worth less than before.

What happens to lenders when inflation is unexpected?

They receive money that has lower purchasing power than expected.

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