The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the
A)expected interest rate.
B)real interest rate.
C)implied interest rate.
D)contractual interest rate.

Question

Quizplus · Accepted Answer

The arithmetic difference between the nominal rate of interest (stated rate without adjustments for inflation) and the expected rate of inflation is the real interest rate. This is because it reflects the actual return that a borrower or lender will earn or pay after accounting for the effects of inflation. Choice A (expected interest rate) is not correct because this term is not commonly used and can be confusing (it may be interpreted as the nominal or real interest rate). Choice C (implied interest rate) is not correct because this term typically refers to the interest rate that would make an investment’s present value equal to its future value, and it does not take inflation into account. Choice D (contractual interest rate) is not correct because this term refers to the rate specified in a loan agreement or bond contract, which may or may not reflect inflation expectations.

The Arithmetic Difference Between the Nominal Rate of Interest and the Expected