ohsofluffy
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What are they??
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Real interest rates (1 Viewer)
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pony_magician
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It is the interest rate after the inflation rate is taken into account/
So say the interest rate is 6% and the inflation rate is 2%, the real interest rate would be 4%
So say the interest rate is 6% and the inflation rate is 2%, the real interest rate would be 4%
ohsofluffy
New Member
oh ty
Spot on!
AussieVesti
Retired Account
Personally, I think the CPI would be a more accurate measure. Underlying inflation is good when you want to measure the theoretical changes in inflation but with the real interest rate, it pertains to the interest rate in terms of a basket of goods so you need to take all the variables at face value.
Well if I remember this right, the RBA sets their inflation goal for underlying inflation (ie. they want to keep underlying inflation at 2-3%), but when conducting DMOs, they react to headline CPI. This is because if you think about it, since underlying is pretty much the average of headline, keeping headline CPI stable and mostly between 2-3% (or whatever goal) will also result in the underlying inflation rate being controlled as well.
Could I throw in something that's largely trivial that bothered me all throughout the HSC economics course, but is interesting to note (not important for marks).
The formula given for real interest rates (as stated above) is normally nominal interest rate - inflation = real interest rate.
However, when you think about it, if there is an interest rate of 6% and an inflation rate of 2%, the real interest rate would not in fact be perfectly 4%, just very close to it. Here's an example.
Say we have $1000 at 6% interest per annum and an inflation rate of 2%. Using the formula, you'd end up with $1000x (1.06-0.02) = $1000 x 1.04 = $1040 equivalent of year 1's dollars. But in fact, you'd end up with 1000x1.06= $1060 of year 2 dollars. To convert that into year 1 dollars we go $1060 * (100/102) = $1039.22, which is a bit different from the $1040.
Anyway, it's pretty irrelevant, and DEFINITELY use the fomula (real interest rate = nominal interest rate - inflation) for any exams. I just found that a bit disconcerting. The same problem applies to Okun's law.
The formula given for real interest rates (as stated above) is normally nominal interest rate - inflation = real interest rate.
However, when you think about it, if there is an interest rate of 6% and an inflation rate of 2%, the real interest rate would not in fact be perfectly 4%, just very close to it. Here's an example.
Say we have $1000 at 6% interest per annum and an inflation rate of 2%. Using the formula, you'd end up with $1000x (1.06-0.02) = $1000 x 1.04 = $1040 equivalent of year 1's dollars. But in fact, you'd end up with 1000x1.06= $1060 of year 2 dollars. To convert that into year 1 dollars we go $1060 * (100/102) = $1039.22, which is a bit different from the $1040.
Anyway, it's pretty irrelevant, and DEFINITELY use the fomula (real interest rate = nominal interest rate - inflation) for any exams. I just found that a bit disconcerting. The same problem applies to Okun's law.