If the nominal interest rate is 2 percent and the inflation rate is 4 percent, then the real rate of interest is
A) -2 percent.
B) 2 percent.
C) 3 percent.
D) 6 percent.

Question

Quizplus · Accepted Answer

The real rate of interest is calculated by subtracting the inflation rate from the nominal interest rate. Thus, the real rate of interest in this case is -2 percent (2 percent - 4 percent = -2 percent). This means that the purchasing power of the money invested is decreasing by 2 percent per year.

If the Nominal Interest Rate Is 2 Percent and the Inflation