Key Learnings Ceteris paribus, rising prices will raise average interest rates in an economy. In contrast, ceteris paribus, a drop in the level of prices will result in a drop in an economy's nominal interest rates.
Consider taking out a $100 loan from your bank a year ago at an interest rate of 8%. If the frequency of compounding differs from the fundamental time unit in which the nominal rate is expressed, the interest rate is said to be nominal.
The increase in the interest rate of money you give the lender as compensation for using the money you borrowed is known as the nominal interest rate.
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