The expected real interest rate (rᵉ) in terms of the nominal interest rate (R) and the expected inflation rate (πᵉ) is given by
A) rᵉ = πᵉ + R.
B) rᵉ = 2πᵉ + R².
C) rᵉ = πᵉ + R².
D) rᵉ = R - πᵉ.
E) rᵉ = R² - πᵉ.

Question

Quizplus · Accepted Answer

The expected real interest rate (rᵉ) can be calculated by subtracting the expected inflation rate (πᵉ) from the nominal interest rate (R), so rᵉ = R - πᵉ. Therefore, option D is the correct answer.

The Expected Real Interest Rate (Rᵉ) in Terms of the Nominal