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Distinguish between the nominal rate and the real rate of interest. How does inflation affect the...

Distinguish between the nominal rate and the real rate of interest. How does inflation affect the real, ex post (after the fact) rate of return to investors?

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Answer #1

Nominal rate of interest will be the rate of interest which will not differentiate between the the real rate of interest and inflation and it will be including the inflation also.

real rate of interest will eliminate the effect of inflation from the overall accounting of the interest rate and it is the pure interest rate after taking out the effect of inflation in the economy.

Real interest rates are getting affected by the inflation and it will be added to the real interest rate in order to achieve the nominal interest rate which will be the investor rate of return.

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