A real interest rate is adjusted to remove the effects of inflation and gives the real rate of a bond or loan

whereas a nominal interest rate refers to the interest rate before taking inflation into account. To
calculate the real interest rate, we subtract the actual or expected rate of inflation from the nominal
interest rate.

The real interest rate gives lenders and investors an idea of the real rate they receive after factoring in
inflation and a better idea of the rate at which their purchasing power increases or decreases. On the
other hand, the nominal interest rate tells them how fast the number of dollars in their bank account
rises over time.

The graph attached shows real and nominal interest rates in the U.S. economy since 1950. The nominal
interest rate in this figure is the rate on three-month Treasury bills. The real interest rate is computed by
subtracting the rate of inflation from this nominal interest rate where the inflation rate is measured as
the percentage change in the CPI. The nominal and interest rates don't move together indicating that
the inflation and hence the real interest rate varies over time. In fact, the nominal interest rate almost
always exceeds the real interest rate. This reflects the fact that the U.S. economy has experienced rising
consumer prices almost every year during this period. For example, from approximately the 1970s to
1983's, nominal interest rates were high. But because inflation was very high, real interest rates were
low. Indeed, during much of the 1970s, real interest rates were negative, for inflation eroded people’s
savings more quickly than nominal interest payments increased them. By contrast, in the late 1990s,
nominal interest rates were lower than they had been two decades earlier.