Money Rate Concept
The money rate is rate offered after incorporating the
inflation effect. We live in inflationary world and therefore this is rate
offered after incorporating prevailing inflation. Banking industry offers money
rate for investment. In simple words the money rate is real rate plus inflation
rate in the market.
How money Rate is calculated
The money
rate can be calculated if we know the prevailing inflation rate and real
interest rate. Money rate can be calculated by multiplying the real interest
rate with inflation rate and this relationship can be express as under.
(1+Monery
Rate) = (1+Real Rate) (1+Inflation Rate)
Example of money Rate
The
prevailing real interest rate is 8% and general inflation rate in the economy
is %4. What money rate will be offered by the banking industry?
Money Rate = (1.08)
x(1.04)-1
Money Rate = 12.32%
It is important to
remember that money rate figure would be slightly above from the figure
obtained by adding real rate and inflation rate. In above example 8% + 4% is
12% while the money rate is 12.32%
