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The Colour

Real Vs Nominal Interest Rates

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Hello everyone

I would be very grateful if someone could explain the difference between real and nominal interest rates.

Thanks in advance

Thecolour

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Hello everyone

I would be very grateful if someone could explain the difference between real and nominal interest rates.

Thanks in advance

Thecolour

Actual rate ('nominal' rate) 5%, inflation 3%, therefore real interest rate 2%. Better to save than to spend.

Actual rate ('nominal' rate) 15%, inflation 22%, therefore real interest rate minus 7%. Better to spend than to save, as prices will go up more than the amount you get on your savings.

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Actual rate ('nominal' rate) 5%, inflation 3%, therefore real interest rate 2%. Better to save than to spend.

Actual rate ('nominal' rate) 15%, inflation 22%, therefore real interest rate minus 7%. Better to spend than to save, as prices will go up more than the amount you get on your savings.

Thanks

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To expand a bit further, the real rate (or price etc) is the actual cost whereas the nominal rate is affected by changes in the value of money.

Imagine a can of fizzy drink. About 20 years ago they used to cost less than 20p; nowadays they are more like 60p

In nominal terms a can is 3 times more expensive but compared to other prices it is probably cheaper today. In reality the price of a can has not increased, the value of a pound has fallen.

The way to deal with this is to express a price in "base terms" so that today a can costs 20p (in 1986 terms) or in 1986 a can cost 60p (in 2006 prices).

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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