The real interest rate is
A)equal to the rate of inflation minus the nominal rate of interest.
B)the market interest rate.
C)equal to the nominal rate of interest minus the rate of inflation.
D)less important for decision making than the nominal rate of interest.
E)always equal to the pure rate of time preference.

Question

Quizplus · Accepted Answer

The real interest rate is defined as the nominal rate of interest minus the rate of inflation. This is because the nominal rate of interest includes both the real interest rate and the rate of inflation. Therefore, subtracting the rate of inflation from the nominal rate gives us the real interest rate. This is important for decision making because it tells us the actual increase in purchasing power we can expect from an investment.

The Real Interest Rate Is