The real interest rate is
A) equal to the rate of inflation minus the nominal rate of interest.
B) always equal to the pure rate of time preference.
C) equal to the nominal rate of interest minus the rate of inflation.
D) less important for decision making than the nominal rate of interest.
E) the market interest rate.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the rate of inflation. This is because the nominal interest rate reflects the actual rate of interest charged by lenders, while the inflation rate erodes the value of the principal over time. By subtracting the inflation rate from the nominal interest rate, one arrives at the real interest rate, which reflects the true cost of borrowing adjusted for inflation.

The Real Interest Rate Is