The nominal interest rate minus the expected rate of inflation ________.
A) defines the real interest rate
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate
D) defines the bank rate

Question

Quizplus · Accepted Answer

The nominal interest rate minus the expected rate of inflation gives us the real interest rate. This is because inflation affects the purchasing power of money, and so, the real interest rate shows us the actual increase in purchasing power that an individual can expect from lending or borrowing.

The Nominal Interest Rate Minus the Expected Rate of Inflation