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# for interest rates "as stated" without adjustment for the full effect of [[compound interest|compounding]] (also referred to as the '''nominal annual rate'''). An interest rate is called '''''nominal''''' if the frequency of compounding (e.g. a month) is not identical to the ''basic time unit'' in which the nominal rate is quoted (normally a year).
The nominal interest rate and the nominal rate of interest, however, are different because of the way the two are defined.
Real rates are the average of the real (before inflation) and the nominal interest rates to date. Real rates are the real rate of interest that would be experienced if a dollar were not held by somebody.
The nominal rate is the real rate of interest that would be experienced if $1 of new money were spent in an economy of constant consumption.
==Nominal versus real interest rate==
The concept of real interest rate is useful to account for the impact of inflation. In the case of a loan, it is this real interest that the lender effectively receives. For example, if the lender is receiving 8 percent from a loan and the inflation rate is also 8 percent, then the (effective) real rate of interest is zero: despite the increased nominal amount of currency received, the lender would have no monetary value benefit from such a loan because each unit of [[currency]] would get devaluated due to inflation by the same factor as the nominal amount gets increased.
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