The real rate of interest is
A)the difference between the stated interest rate and the rate of growth of real GDP.
B)the difference between the stated interest rate and the expected rate of inflation.
C)the rate of interest on Treasury bills.
D)the sum of the stated interest rate plus the expected inflation rate.
E)the same as the federal funds rate.

Question

Quizplus · Accepted Answer

The real rate of interest is the difference between the stated interest rate and the expected rate of inflation. This is because inflation erodes the purchasing power of money, so investors and lenders require a higher return to compensate for the loss in value caused by inflation. The real rate of interest reflects the true cost of borrowing or the true return on investment, after inflation has been accounted for.

The Real Rate of Interest Is