The real interest rate
A)increases when the inflation rate increases.
B)is approximately equal to the nominal interest rate plus the inflation rate.
C)is approximately equal to the nominal interest rate minus the inflation rate.
D)can never be negative.
E)is determined in the market for money.

Question

Quizplus · Accepted Answer

The real interest rate is approximately equal to the nominal interest rate minus the inflation rate. This is because inflation erodes the purchasing power of money, so the actual or real return on an investment is reduced by the amount of inflation. Subtracting the inflation rate from the nominal interest rate gives us the real interest rate, which is a more accurate measure of the return on an investment after accounting for inflation.

The Real Interest Rate