To calculate the real interest rate, we:
A) add the rate of inflation to the nominal interest rate.
B) subtract the rate of inflation from the nominal interest rate.
C) subtract the nominal interest rate from the rate of inflation.
D) divide the nominal interest earned by the rate of inflation.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the rate of inflation. This is because the nominal interest rate represents the rate at which money grows over time, but inflation reduces the purchasing power of that money. Therefore, to calculate the true growth rate of money, we need to adjust for inflation by subtracting it from the nominal interest rate.

To Calculate the Real Interest Rate, We