The real rate of interest is defined as the
A) expected inflation rate minus the nominal interest rate.
B) expected inflation rate plus the nominal interest rate.
C) nominal interest rate minus the expected inflation rate.
D) nominal inflation rate plus the expected inflation rate.

Question

Quizplus · Accepted Answer

The real rate of interest is calculated by subtracting the expected inflation rate from the nominal interest rate, giving a measure of the actual purchasing power of the return on an investment. Option A and D are incorrect because they add or subtract both the expected inflation rate and the nominal interest rate, which would result in an unrealistic rate of interest. Option B is incorrect because adding the expected inflation rate would raise the nominal interest rate, which would artificially inflate the real rate of interest.

The Real Rate of Interest Is Defined as the