The real interest rate is
A)The difference between the prime rate and the rate charged by the government (the Federal Reserve)on loans.
B)The nominal interest rate minus the anticipated rate of inflation.
C)The inflation rate minus the percentage increase in average wages.
D)The sum of inflation rates and unemployment rates.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the anticipated rate of inflation from the nominal interest rate. This gives a more accurate picture of the true cost of borrowing or the true return on investment, as it takes into account the impact of inflation on the value of money over time. Option A is incorrect as the prime rate and the rate charged by the Federal Reserve are both nominal interest rates. Option C is incorrect as it subtracts the percentage increase in average wages, which is not related to the interest rate. Option D is incorrect as it adds together two different economic indicators (inflation and unemployment) that are not directly related to the real interest rate.

The Real Interest Rate Is