Nominal interest, real interest, and inflation calculations | AP Macroeconomics | Khan Academy

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The market for loanable funds brings savers and borrowers together. We can also represent the same idea using a mathematical model. In this video, learn about the savings and investment identity. AP(R) Macroeconomics on Khan Academy: Macroeconomics is all about how an entire nationÕs performance is determined and improved over time. Learn how factors like unemployment, inflation, interest rates, economic growth and recession are caused and how they affect individuals and society as a whole. We hit the traditional topics from an AP Macroeconomics course, including basic economic concepts, economic indicators, and the business cycle, national income and price determination, the financial sector, the long-run consequences of stabilization policies, and international trade and finance. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything www.youtube.co....
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[@comrade3909]

You've explained in 3 minutes what I didn't understand from my books in 3 hours. Thank you.

[@rajeshnaidu376]

Understanding the definitions in the text book is like deciphering a code. This is a really great and simple explanation.

[@thomasward7196]

The textbook I am working from was written by the professor and is incredibly dense, thank you for explaining this in a simplistic way.

[@SanketDube]

1:53 Thank you for this. I have been going nuts over the past 15 minutes to figure out why some sources are calculating the real rate of return differently than others.

[@felipegomes9646]

Amazing and very concise video. It contains exactly what I was looking for and in just 3 minutes I got it, thanks!

[@jansasha2628]

Simply beautiful

[@bi0lizard1]

I NEVER want to be more mathematically precise.

[@Anonymous-we4eu]

What an explanation! Impressed!! Thank you so much!!!!!!!!!!!!!!

[@eastonhubbard7963]

thanks for keeping this simple and quick. My textbook over explains it and complicates this.

[@giulianonigro774]

Quick and simple. Very effective explanation!

[@user-jl3uk7yj7y]

Need more people so spread this video more

[@mikoabong]

"If you can't explain it simply, you don't understand it well enough." -Einstein

[@Leandrasjones]

Can you explain more detail on why it's 1.05 / 1.02, please ? what did you take the 1.0294 calculated from to arrive at the 2.94?

[@saniahashmi8840]

Can you also tell me why has he written 5% as 1.05 i am confused

[@Leandrasjones]

@@saniahashmi8840 it adding the 5% to the initial figure. Let’s look at an example. I have $100 dollars. I want to increase that by 5% instead of working out 5% ($5) and then adding $100 to get $105. If you multiply 100*1.05 you will get $105 immediately. Let me know if I understood your question correctly.

[@ceilnomorales7773]

@@Leandrasjones I'm hours away before reporting and i just want to thank you for answering this question. Thanks a looot!

[@nehemiahwapa8824]

How does subtracting 1 from 1.0294 represent the amount of loan?

[@awakenedspirit7947]

​@@nehemiahwapa8824 Remember initial amount + interest = total amount Similarly 1 (initial amount) + 0.0294 (interest amount) = 1.0294. So when he say 0.0294 he is referring to the interest.

[@daphnedominique3711]

Thank you for explaining this concept in layman's terms. Thank you

[@saianjanakella5879]

Sal Khan THE GOAT

[@thatomashopha]

I finally understand this concept. thank you

[@nandinisingh1733]

Thanki sir

[@rujanraut4088]

You have sweet voice and simply best videos

[@subhashsainisubhashsaini9163]

Y7777787 7 but

[@mririmanan27]

Thank you and subscribed

[@mag5993]

great video!

[@AHMD_a1]

Hey I have a general question in Economics. lets says country’s current inflation is 8% and the target is to set it at 2%. The question is: The average interest rate you get on the bonds you purchased is 2% Are you making a profit in the “nominal” term? Why?

[@AA-dq5uo]

Hey @KhanAcademy, now do this for deflationary scenario with inflation of -3%. Please explain why the resulting higher real interest rate is bad from the perspective of the FED who wants zero rates so that people and busnisses can borrow.

[@lethalexponent6]

I took economics, personal finance and general business in high school and somehow never learned about this

[@catherinejoyavelino7493]

Good day. Your video is very well explained and easy to understand. I just have one question. If there is another predicted inflation in the future. I should just add the current inflation and the predicted inflation?

[@Sarjerao88]

Sir, my doubt is that,, how nominal intrest rate exceed real intrest rate if inflation in positive& vice versa Plz reply Thank you

[@surin6953]

Can someone explain why 1.0294 becomes 2.94%? Thank you!

[@aasthajain8611]

If there is no inflation present, the real rate and the nominal rate would be the same?

[@rajan9651]

Hi there, Thanks for the great video. Could you tell me what you use for the video I mean the software? Thanks.

[@Madeline-ki6bv]

Can you explain more detail on why it's 1.05 / 1.02, please? Thank you ever so much

[@deybdeyb5388]

it should be just 0.5 lols.. 5% = 5/100

[@mririmanan27]

@@deybdeyb5388 no it's supposed to be 1.05. The number 1 is 100% .5 is 50% and 0.05 is 5%.

[@aufadedicated4633]

yeepp

[@littlepip4014]

How do you find the NIR and RIR if neither are given? Question is you deposit 2,000 in a savings account and a year later you have 2,100. Meanwhile the CPI raises from 200-204. In this case the nominal interest rate is ____ and the real interest rate is _____. You cant find the nir and rir using these equations because there is none given. The only way I could find them was by using inflation. Nominal is dollars and the real is CPI So the correct answer is 5% and 3% But the book doesnt go over how to get to this conclusion at all. Or if I just somehow got lucky and the inflation happened to be the same answer.

[@patiencesethibe8923]

Help😭😭😭 You have P280 000 available for a deposit on a house that will cost you P960 000 (including transfer costs, etc). You can obtain a mortgage loan from the bank at 20% per annum compounded monthly and a term of 25 years. Your company is willing to grant you a housing subsidy of P2 000 per month. What would the monthly payments be in total, and what would they be after deduction of the subsidy? What is the total interest that will be paid over the term of the loan? How does this compare with the total real cost of the loan, assuming an inflation rate of 0.75% per month? And how does the total real cost of your share of the payments compare with the principal borrowed?

[@itsnrv1817]

what if my real interest rate comes out with a negative number? do i run with that?

[@generemotebookkeeping6813]

I am looking for the answer. Did you find it?

[@itsnrv1817]

@@generemotebookkeeping6813 i can’t remember bc it was for a class i don’t take anymore lol. best to ask your professor or someone you know who might know this info. my inclination if memory serves right is that it just means your real interest is lower than your nominal interest and that that’s okay

[@itsnrv1817]

@@generemotebookkeeping6813 if i can find the note book i kept my notes in i will come back and let you know

[@generemotebookkeeping6813]

@@itsnrv1817 I think we're going to have deflation. My question is if we have drflation for more than a year will Gold decline 40% and stay there? All the gold-bug say gold will hold its value. But I don't think so

[@mahakgarg3841]

@@generemotebookkeeping6813 Well, if it comes negative, would you want that money to lend it to someone ? It would be irrational to do so. These metrics help us understand where to invest and where not. Investments that give negatives are rejected.

[@bramhakrthk7526]

the nominal rate of return is 8.00%. the real rate of return is 3.00%. calculate the rate of inflation? answer plz

[@Alan-eb6zi]

5% ?

[@linaelmoutaki5610]

I really don't understand, PLEASE HELP. if real interest rate take into account inflation, why do we subtract it. It doesn't make sense to me, I feel like the equation should be : real interest rate = nominal rate of return + inflation. Please @KhanAcademy or anyone :(

[@brawlboi7534]

Let's say the nominal int rate is 10% and you expect inflation to be 5% in next year Nominal interest rate Borrow 1$ this year pay 1.10$ next year Real Interest rate You can buy one pound of bread(good) today for 1$ But the same good will cost you 1.05$ next year because of the inflation Conclusion: you are paying 0.05$ more than the actual price of bread,the price of bread in next year is 1.05 but you are paying 1.10 , the extra you are paying is real interest rate I hope you understand Using the formula = 10%-5%=0.05 (I'm late but I still hope it helps)