The real rate of interest is
A) interest paid by commercial banks.
B) interest paid by the Fed.
C) equal to the money rate of interest plus the inflationary premium.
D) the money rate of interest adjusted for inflation.

Question

Quizplus · Accepted Answer

The real rate of interest is the money rate of interest adjusted for inflation. This means that it takes into account the changes in the purchasing power of money over time, and gives a more accurate measure of the cost of borrowing or return on investment. Answer A is incorrect because commercial banks pay interest, they do not receive it. Answer B is incorrect because the Fed sets the federal funds rate, but does not pay interest directly. Answer C is partially correct, as it includes the inflationary premium, but it is missing the adjustment for the money rate of interest.

The Real Rate of Interest Is