I am student and recently have come across 2 equations which explain basically the same thing. It's about the real interest rate. One equation tells us: real interest = nominal interest - inflation The other one says: 1+real interest = ((1+inflation) / (1+nominal interest)) Which one is correct? Which one should we use? Thank you!
The nominal interest rate associated with an asset (for example, a deposit in an interest-bearing savings account) is the rate at which the dollar value of the asset increases over time. The corresponding real interest rate is the rate at which the purchasing power of the asset’s value increases over time. Inflation (a general increase in the prices of goods and services) can erode the purchasing power of the asset’s nominal value, leading to a real interest rate that is less than the nominal interest rate.