John Creighto said:If monetary policy worked (which it doesn't) then they should be identical (in shape not necessarily in value) as inflation should be constant.
The nominal interest rate is the rate of interest that is advertised by banks and financial institutions. It represents the percentage increase in the borrower's debt for a certain period of time. On the other hand, the real interest rate takes into account the effect of inflation. It is calculated by subtracting the inflation rate from the nominal interest rate.
Understanding the difference between real and nominal interest rates is important because it allows individuals to make informed decisions about their investments and borrowing. Real interest rates provide a more accurate picture of the cost of borrowing or the return on investments, as they take into account the effects of inflation.
In general, higher nominal interest rates lead to higher real interest rates, which can slow down economic growth. This is because higher interest rates make it more expensive for businesses and individuals to borrow money, which can reduce their spending and investment. On the other hand, lower interest rates can stimulate economic growth by making it cheaper to borrow and encouraging spending and investment.
Real and nominal interest rates can be influenced by a variety of factors, including inflation expectations, central bank policies, supply and demand for credit, and the overall state of the economy. Inflation expectations can impact nominal interest rates, while changes in the economy can affect both nominal and real interest rates.
Individuals can protect themselves from the effects of high inflation and interest rates by diversifying their investments and choosing assets that are less impacted by inflation. This can include investing in commodities, real estate, or inflation-adjusted securities. Additionally, individuals can also consider refinancing loans or mortgages to take advantage of lower interest rates during periods of high inflation.