The nominal interest rate minus the expected rate of inflation
A)defines the real interest rate.
B)is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.
C)is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.
D)defines the discount rate.

Question

Quizplus · Accepted Answer

The nominal interest rate minus the expected rate of inflation defines the real interest rate. It is a more accurate measure of the incentives to borrow and lend as it accounts for the effect of inflation on the purchasing power of the borrowed or invested funds. It is also a better indicator of the tightness of credit market conditions as it reflects the true cost of borrowing or the return on investment after accounting for inflation. The discount rate is a different concept used in the valuation of financial assets.

The Nominal Interest Rate Minus the Expected Rate of Inflation