The growth rate of a unit of invested funds (dollars, euros, yen, etc) over a specific period of time. It is the interest rate in current dollars, i.e., it is not adjusted for expected inflation. This rate is typically determined by the forces of supply and demand in the loanable funds market. Therefore, the nominal interest rate will respond to a change in the demand for or supply of loanable funds. When the nominal rate of interest is adjusted for expected inflation, the resulting rate is known as the real rate of interest:
Nominal rate of interest – expected inflation rate = real rate of interest
For example, the nominal rate of interest is the interest rate charged on a loan or earned on a savings account. A $1,000 certificate of deposit that yields 8% annual interest is said to have a 8% annual nominal interest rate.
The real rate of interest is sometimes called the actual rate of interest.
