Final answer:
The APR, or actual rate paid or earned on an investment or loan, is referred to as the effective interest rate. It provides a more accurate reflection of cost or return, factoring in interest compounding and inflation or deflation.
Step-by-step explanation:
The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the effective interest rate. This differs from the nominal interest rate, which is the stated rate without adjustment for the compounding of interest over time or other factors like inflation. The effective interest rate provides a more accurate reflection of the actual cost of borrowing or the actual rate of return on an investment. For example, if the nominal interest rate is 7% and the rate of inflation is 3%, then the borrower effectively pays a 4% real interest rate. Conversely, with deflation of 2%, the real interest rate would be 9%. This adjustment is crucial as it affects the actual burden or benefit of the loan, potentially leading to higher defaults or affecting aggregate demand and the broader economy.