2.2 Interest Rates (2.5)

Question 1

interest rate

Answer 1

rate of return promised by a borrower to a lender

Question 2

an interest rate indicates how quickly the nominal (dollar) value of an interest-bearing assert increases over time, but it does not reveal…

Answer 2

an interest rate indicates how quickly the nominal (dollar) value of an interest-bearing assert increases over time, but it does not reveal how quickly the value of the asset changes in real, purchasing power terms.

Question 3

real interest rate (real rate of return)

Answer 3

the rate at which the real value or purchasing power of the asset increases over time

Question 4

nominal interest rate i

Answer 4

the rate at which the nominal value of an asset increases over time

Question 5

real interest rate formula

Answer 5

real interest rate = nominal interest rate - inflation rate

= i - (pi)

Question 6

expected real interest rate

Answer 6

expected real interest rate = nominal interest rate - expected rate of inflation

r = i - (pi)^e