The relationship between the nominal interest rate, the real interest rate, and the inflation rate is that the
A) real interest rate is equal to the nominal interest rate plus the inflation rate.
B) nominal interest rate is equal to the real interest rate plus the inflation rate.
C) real interest rate is equal to the nominal interest rate multiplied by the inflation rate.
D) nominal interest rate is equal to the real interest rate divided by the inflation rate.
E) nominal interest rate is equal to the real interest rate minus the inflation rate.

Question

Quizplus · Accepted Answer

The nominal interest rate is equal to the real interest rate plus the inflation rate. This is because the nominal interest rate is the rate of return that is advertised by banks and financial institutions, while the real interest rate is the actual rate of return that takes into account the effects of inflation. Therefore, to get the real interest rate, we need to subtract the inflation rate from the nominal interest rate, and to get the nominal interest rate, we need to add the inflation rate to the real interest rate.

The Relationship Between the Nominal Interest Rate, the Real Interest