The real interest rate is
A) the nominal interest rate plus the anticipated inflation rate.
B) the nominal interest rate minus the anticipated inflation rate.
C) the nominal interest rate plus a COLA.
D) the nominal interest rate plus the GDP deflator.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the anticipated inflation rate from the nominal interest rate. This gives a measure of the true cost of borrowing or return on investment, adjusted for inflation. Therefore, option B is the correct answer. Option A is incorrect because it adds the anticipated inflation rate to the nominal interest rate, which results in an overestimation of the true cost or return. Option C is incorrect because a COLA (Cost of Living Adjustment) is not related to interest rates. Option D is incorrect because the GDP deflator is a measure of the overall price level in the economy, which is not directly related to interest rates.

The Real Interest Rate Is