Which of the following equations is correct?
A) Expected real interest rate = Nominal interest rate + Expected inflation rate.
B) Expected real interest rate = Nominal interest rate ÷ Expected inflation rate.
C) Expected real interest rate = Expected inflation rate ÷ Nominal interest rate.
D) Expected real interest rate = Nominal interest rate ‒ Expected inflation rate.

Question

Quizplus · Accepted Answer

The correct equation for expected real interest rate is the nominal interest rate minus the expected inflation rate. This is because the real interest rate represents the purchasing power of the funds being invested or borrowed, and inflation reduces the value of those funds over time. Therefore, in order to determine the true return on an investment or loan, the expected inflation rate must be subtracted from the nominal interest rate.

Which of the Following Equations Is Correct