Nominal Interest Rate: % increase in money paid for interest, Not adjusted for Inflation, but for anticipated inflation.
NI = Expected Inflation Rate + Inflation Premium (usually less than 10)
Real Interest Rate= % increase in purchasing power in interest, adjusted for inflation, Unanticipated
Inflation.
The Fisher Effect states that the real interest rate is equal to the nominal rate minus the expected rate of inflation.
RIR = NIR - Expected Inflation rate
COLA or Cost of Living Adjustment: Automatically raises wages to increase with inflation.
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