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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Why does the real interest rate, not the nominal interest rate, matter to borrowers and lenders?

To determine

The difference between real interest rate and nominal interest rate. 

Explanation

The nominal interest rate is the amount in money terms of the interest payable, whereas the real interest is the amount that is equal to the nominal interest minus expected inflation rate.  According to the borrowers and lenders, they are only bothered about the real value of interest rate. This is because the interest rate paid by the borrowers and the interest rate received by the lenders is the real interest rate and not the nominal interest rate...

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