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

Question

Quizplus · Accepted Answer

The nominal interest rate minus the expected rate of inflation defines the real interest rate. It is a better measure of the incentives to borrow and lend than the nominal interest rate, as it reflects the true cost of borrowing or the true return on lending. It is also a more accurate indicator of the tightness of credit market conditions than the nominal interest rate, as it takes inflation into account. Therefore, all of the above choices are correct.

The Nominal Interest Rate Minus the Expected Rate of Inflation