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

Question

Quizplus · Accepted Answer

The real interest rate is equal to the nominal interest rate minus the rate of inflation. This is because the nominal interest rate reflects the rate at which money grows over time, while the inflation rate reflects the rate at which prices increase over time. The real interest rate therefore gives a more accurate picture of the return on an investment, as it accounts for the decrease in purchasing power due to inflation.

The Real Interest Rate Is