The real interest rate is defined by

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate (the rate actually specified on the loan contract or investment) minus the expected rate of inflation over the life of the asset. This is because the nominal interest rate represents the compensation an investor receives for postponing consumption, but inflation reduces the value of that compensation over time. By subtracting the expected inflation rate from the nominal rate, we get the real rate which represents the true increase in purchasing power that the investor will experience.

The Real Interest Rate Is Defined by