Question

1. Explain "physical projects" and "regulatory programs". What is the challenge regarding the regulatory programs?

2. Name two possible discount rate. Also, explain the difference between nominal and real rate

Answer 1

2)

DISCOUNT RATE:

Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal Reserve Bank through the discount window loan process, and second, the discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

1. the minimum interest rate set by the US Federal Reserve (and some other national banks) for lending to other banks.

2. a rate used for discounting bills of exchange.

THE DIFFERENCE BETWEEN THE NOMINAL AND REAL RATE:

Interest rates are a fundamental part of financial economics. They help us evaluate and compare different investments or loans over time. However, if we compare financial data over time, we have to consider the effects of inflation. This is why we distinguish between two different types of interest rates in economics: the nominal interest rate and the real interest rate. We will look at both of them in more detail below.

NOMINAL INTEREST RATE:

• The nominal interest rate describes the interest rate without any correction for the effects of inflation.
• Thus, the advertised or stated interest rates we see on bonds, loans or bank accounts is usually a nominal one.
• This rate shows you the actual price you are paid (or have to pay) if you lend (or borrow) money.
• Simply put, it shows you by how much the amount of money you have in your bank account increases over time.

REAL RATE:

• The real interest rate refers to the interest rate adjusted to remove the effects of inflation.
• This rate shows you by how much the actual purchasing power of the money you have in your bank account increases over time.
• In other words, it describes the real yield of lending money or the real cost of borrowing money (hence the name). Calculating the real interest rate is actually quite simple.
• All we need to do is take the nominal interest rate and subtract the inflation rate. This equation is also referred to as the Fisher equation.