AP Macroeconomics Flashcards: Nominal v. Real Interest Rates
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
A bank wants to earn a 3% real interest rate and expects inflation to be 2%. What nominal interest rate should it charge?
The bank should charge a 5% nominal interest rate, which is the sum of the 3% expected real rate and 2% expected inflation.
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A bank wants to earn a 3% real interest rate and expects inflation to be 2%. What nominal interest rate should it charge?
The bank should charge a 5% nominal interest rate, which is the sum of the 3% expected real rate and 2% expected inflation.
What is the relationship between nominal interest rates, expected inflation, and real interest rates?
The nominal interest rate is the sum of the expected real interest rate and the expected rate of inflation.
How do lenders and borrowers establish nominal interest rates?
Lenders and borrowers establish nominal interest rates as the sum of their expected real interest rate and the rate of expected inflation.
What key factor is the nominal interest rate unadjusted for?
The nominal interest rate is unadjusted for inflation, meaning it does not account for changes in purchasing power.
Define real interest rate.
The real interest rate is the nominal interest rate adjusted for inflation, calculated by subtracting the actual inflation rate from the nominal interest rate.
How do you calculate the real interest rate in hindsight?
A real interest rate can be calculated in hindsight by subtracting the actual inflation rate from the nominal interest rate.
If the nominal interest rate is 7% and the actual inflation rate is 3%, what is the real interest rate?
The real interest rate is 4%, which is calculated by subtracting the 3% actual inflation rate from the 7% nominal interest rate.
What two components are added together to determine the nominal interest rate?
The nominal interest rate is determined by adding the expected real interest rate and the expected inflation rate.
If a loan has a 5% nominal interest rate but actual inflation is 6%, what is the real interest rate for the lender?
The real interest rate is -1%, calculated by subtracting the 6% actual inflation rate from the 5% nominal rate.
Define nominal interest rate.
A nominal interest rate is the rate of interest paid for a loan, unadjusted for inflation.