Let i be the rate of inflation and r the nominal interest rate.(We use pi to denote the rate of inflation in the book.)The (exact)real rate of interest is given by
A)(r - i)/(i + 1).
B)(r + i)/(i + 1).
C)(r + i)/(i - 1).
D)(r - i)/(i - 1).
E)r - i/r.

Question

Quizplus · Accepted Answer

The exact real rate of interest is given by the formula $(1 + r) / (1 + i) - 1$, which simplifies to $(r - i) / (1 + i)$, matching the structure of option A.

Let I Be the Rate of Inflation and R the Nominal