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(ECONOMICS) the difference between the nominal interest rate and the rate of inflation; the actual premium charged by banks for lendable funds. The real interest rate can be determined by [subtracting] the annualized rate of inflation from the prime rate offered by banks to borrowers with the best credit. During the 1970's, the USA [experienced] relatively high inflation (peaking at 17% in January 1980). In some months this exceeded the prime rate, resulting in negative interest rates for short periods (e.g., April-October, 1978; Feb-July, 1979). One problem of deflation (i.e., falling absolute prices) is that it always occurs when the economy is in VERY severe recession, and there is no way [the central bank] can reduce the real interest rate to zero, since 0% nominal rates minus negative inflation = positive real interest rates.
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