The real interest rate is equal to
A)the real GDP rate + savings rate.
B)growth rate in prices.
C)nominal interest rate + expected inflation rate.
D)nominal interest rate - expected inflation rate.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. This is because inflation erodes the purchasing power of money over time, and therefore the "real" value of an investment or loan is given by the interest rate adjusted for inflation. Therefore, the real interest rate is equal to the nominal interest rate minus the expected inflation rate.

The Real Interest Rate Is Equal to