Which of the following is a definition of the real interest rate in a world with a positive inflation rate?
A) The percentage increase in the borrower's purchasing power from taking a loan
B) The percentage decrease in the borrower's dollars from taking a loan
C) The percentage increase in the lender's purchasing power from making a loan
D) The percentage increase in the lender's dollars from making a loan
E) The percentage decrease in the lender's dollars from making a loan

Question

Quizplus · Accepted Answer

In a world with positive inflation rates, the real interest rate takes into account the difference between the nominal interest rate (the one stated on the loan) and the inflation rate. The real interest rate measures the percentage increase in the lender's purchasing power from making a loan, as it represents the return to the lender after accounting for inflation. Therefore, option C is the correct definition of the real interest rate in this scenario. Option A is incorrect because it only takes into account the borrower's purchasing power, not the lender's. Option B, D, and E are all incorrect because they focus on the changes in the lender's or borrower's dollars, rather than their purchasing power.

Which of the Following Is a Definition of the Real