The expected real interest rate equals
A)the nominal interest rate minus the tax rate.
B)the nominal interest rate minus the expected rate of inflation.
C)the nominal interest rate plus the expected rate of inflation.
D)the yield to maturity on a coupon bond held to maturity.

Question

Quizplus · Accepted Answer

The expected real interest rate is the nominal interest rate minus the expected rate of inflation. This is because the nominal interest rate includes an inflation premium, meaning that lenders charge a higher nominal interest rate to compensate for expected inflation. Therefore, by subtracting the expected rate of inflation from the nominal interest rate, we can determine the expected real interest rate.

The Expected Real Interest Rate Equals