Which of the following equations best represents the long-term real interest rate? The long-term real interest rate =
A) the short-term real interest rate + the term structure effect + the default-risk premium + the expected rate of inflation
B) the short-term nominal interest rate + the term structure effect + the default-risk premium - the expected rate of inflation
C) the long-term nominal interest rate + the term structure effect + the default-risk premium - the expected rate of inflation
D) the short-term nominal interest rate - the term structure effect - the default-risk premium + the expected rate of inflation

Question

Quizplus · Accepted Answer

The long-term real interest rate represents the return on investment adjusted for inflation over the long term. It can be calculated by subtracting the expected rate of inflation from the nominal interest rate at each point in time. The term structure effect and default-risk premium are additional factors that can affect the nominal interest rate. Therefore, the best equation to represent the long-term real interest rate is:
Long-term real interest rate = short-term nominal interest rate + term structure effect + default-risk premium - expected rate of inflation.

Which of the Following Equations Best Represents the Long-Term Real