Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define the nominal interest rate and the real interest rate, and say which one measures purchasing power. (Guide: “What an interest rate measures”; Practice Q1, Q6(a))
- I can explain why lenders and borrowers build expected inflation into the nominal rate. (Guide: “How lenders and borrowers set a nominal rate”)
- I can explain the difference between the real rate expected when a loan is agreed and the real rate calculated in hindsight. (Guide: “Calculating a real rate in hindsight”; Worked example 2(d))
Calculation
- I can calculate a nominal rate from an expected real rate and expected inflation. (Guide: Worked example 1(a); Practice Q2, Q6(b))
- I can calculate a real rate in hindsight from a nominal rate and actual inflation, including a negative real rate. (Guide: Worked example 1(b); Practice Q3, Q6(c))
- I can calculate inflation from CPI data and then the real interest rate for each year, including years with deflation. (Guide: Worked example 2; Practice Q5)
- I can find the new nominal rate when expected inflation changes and the expected real rate stays the same. (Practice Q4, Q7(d))
Reasoning
- I can explain who gains and who loses when actual inflation is higher or lower than expected. (Guide: Worked example 1; Practice Q6(d))
- I can explain why a higher nominal rate is not always a better deal for a saver. (Guide: Worked example 2(c); Practice Q7(b))
- I can explain why deflation makes the real rate higher than the nominal rate. (Guide: Worked example 2, “Check”)
All ticked? Move on to Topic 4.3, Definition, Measurement, and Functions of Money, or return to the course roadmap.