Tuesday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 8 The Data of Macroeconomics
Chapter 24 of 36 Measuring The Cost of Living
Section 13 of 14
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Figure 3 - Real and Nominal Interest Rates
This figure shows nominal and real interest rates using annual data since 1965.
The nominal interest rate is the rate on a 3-month Treasury bill.
The real interest rate is the nominal interest rate minus the inflation rate as measured by the consumer price index.
Notice nominal and real interest rates often do not move together.
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The real interest rate is computed by subtracting the rate of inflation from the nominal interest rate.
Figure 3 illustrates the fact during normal economic times, when the nominal interest rate is above the inflation rate, the real interest rate is above zero.
Figure 3 also shows because inflation is variable real and nominal interest rates do not always move together.
In the late 1970s nominal interest rates were high and rising.
But because inflation was very high during much of the 1970s real interest rates were negative.
The high inflation rates decreased the value people's savings more rapidly than interest payments increased.
In the late 1990s nominal interest rates were lower than in the mid-1970s.
But because inflation was considerably lower, real interest rates were higher.
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real interest rate and nominal interest rate
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