If the nominal interest rate is 10% and the rate of inflation is 7%, what is the real rate of interest?

Question

Quizplus · Accepted Answer

The real interest rate can be calculated using the formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate. Therefore, Real Interest Rate = 10% - 7% = 3%. However, to accurately reflect the compounding effect, the formula should be: (1 + Real Interest Rate) = (1 + Nominal Interest Rate) / (1 + Inflation Rate). Solving this gives a Real Interest Rate slightly different from 3%, but since the exact calculation isn't provided in the options, the closest match is 3%, which is a misunderstanding in the explanation. The correct calculation using the accurate formula would indeed yield a result closer to 2.8%, acknowledging a mistake in the initial explanation.

If the Nominal Interest Rate Is 10% and the Rate