The difference between the interest rate on a loan and the inflation rate is the
A) nominal interest rate.
B) inflation premium.
C) real interest rate.
D) expected interest rate.

Question

Quizplus · Accepted Answer

The difference between the interest rate on a loan and the inflation rate is called the real interest rate. This is because it shows the true cost of borrowing money after accounting for inflation. The nominal interest rate (choice A) is simply the stated interest rate on the loan, without adjusting for inflation. The inflation premium (choice B) is not a commonly used term in finance, but it could refer to the additional rate of return required by investors to compensate for expected inflation. The expected interest rate (choice D) is the anticipated rate at which borrowers will have to pay interest on their loans, and is influenced by a variety of factors including inflation expectations, risk premiums, and monetary policy.

The Difference Between the Interest Rate on a Loan and the Inflation