The expected real interest rate (re) in terms of the nominal interest rate (R) and the expected inflation rate (πe) is given by
A) re = πe + R.
B) re = 2πe + R2.
C) re = πe + R2.
D) re = R - πe.
E) re = R2 - πe.

Question

Quizplus · Accepted Answer

The expected real interest rate can be calculated by subtracting the expected inflation rate from the nominal interest rate. Therefore, the correct formula is re = R - πe, which is given by option D.

The Expected Real Interest Rate (Re) in Terms of the Nominal