The real rate of interest will approximately be equal to
A) the nominal interest rate plus the expected rate of inflation.
B) the stated rate of interest in a high-inflation economy.
C) the nominal interest rate minus the expected rate of change in the price level.
D) the stated rate minus the opportunity cost of capital.

Question

Quizplus · Accepted Answer

The real rate of interest is the nominal interest rate minus the expected rate of change in the price level. This is because the nominal interest rate reflects the compensation that lenders receive for deferring consumption and taking on risk, while the expected rate of change in the price level reflects the erosion of purchasing power that borrowers experience due to inflation. Subtracting the expected rate of change in the price level from the nominal rate adjusts for inflation and yields the real rate of interest, which represents the true cost of borrowing or the true return on lending.

The Real Rate of Interest Will Approximately Be Equal to