DECA Financial Consulting Practice Exam 2025 - Free DECA Financial Consulting Practice Questions and Study Guide

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What is the difference between nominal and real interest rates?

Nominal rates account for inflation, while real rates do not

Nominal rates are used for all loans, while real rates are only for savings

Nominal rates do not account for inflation, while real rates adjust for inflation

Nominal interest rates represent the stated interest rate unadjusted for any inflationary effects. This means it reflects the percentage increase in money that the borrower pays to the lender without considering how much the purchasing power of that money might change over time. On the other hand, real interest rates adjust for inflation, which means they reflect the true cost of borrowing in terms of what the money can actually buy.

By taking inflation into account, the real interest rate provides a clearer picture of the lender's purchasing power and is more indicative of the true economic cost of borrowing. Therefore, the distinction that nominal rates do not adjust for inflation while real rates do is a fundamental concept in finance, helping borrowers and lenders understand the impact of inflation on the value of money over time. This understanding is crucial for making informed financial decisions.

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Nominal rates are generally lower than real rates

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