Unit 3 · Level 1 · Interest rates
Real vs nominal
The rate on the poster is the NOMINAL rate. What your money actually gains in purchasing power is the REAL rate: nominal minus inflation. A 5% account during 8% inflation is a losing deal dressed as a winning one. Always run this one subtraction before celebrating.
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What you get asked
Your savings account pays 5% while inflation runs at 3%. What is your real return, in %?
5% nominal − 3% inflation = 2% real. That 2% is the only part that buys you more than before.
Savings pay 3% while inflation runs 8%. In real terms you are…
3 − 8 = −5. Your balance grows while your buying power shrinks. That's the classic money illusion of 2022's savings accounts.
Real rate ≈ nominal rate minus ___.
One subtraction turns advertising into truth. (Taxes and fees bite too, but inflation is the definitional piece.)
Match the term to what it really means.
Money illusion is thinking a 4% raise during 7% inflation made you richer. Nominal up, real down.
Through the 2010s many European savers earned about 0% while inflation ran 1-2%. Their cash…
A 'safe' account with a negative real rate is a slow leak: at −1.5% real, a decade quietly removes roughly 14% of your purchasing power. Safety has a price too. 🐜
The rest of this unit
The price of money: how one number ripples through everything you own.