The real interest rate is
A) always equal to the pure rate of time preference.
B) equal to the rate of inflation minus the nominal rate of interest.
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.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. Therefore, it is equal to the nominal interest rate minus the rate of inflation. This reflects the true cost of borrowing or the true return on investment, as it takes into account the impact of inflation on the value of money over time. Choice A is not correct because the pure rate of time preference is the rate at which individuals value present consumption versus future consumption, and is not necessarily equal to the real interest rate. Choice B is incorrect because it reverses the calculation of the real interest rate. Choice D is incorrect because the real interest rate is an important consideration for decision making, as it provides a more accurate measure of the cost of borrowing or return on investment.

The Real Interest Rate Is