Asked by Rikki Sawlsville on Mar 10, 2024

Verified

# In words, the real rate of interest is approximately equal to

A) the nominal rate minus the inflation rate.

B) the inflation rate minus the nominal rate.

C) the nominal rate times the inflation rate.

D) the inflation rate divided by the nominal rate.

E) the nominal rate plus the inflation rate.

Real Rate of Interest

The interest rate that has been adjusted to remove the effects of inflation; reflects the true cost of borrowing.

Nominal Rate

The rate of interest before adjustments for inflation, representing the face value rate agreed upon in financial instruments and agreements.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

- Clarify the differences between nominal, real, and inflation rates, and compute the return rate in real terms.

Verified Answer

JA

John Alexis AlvarezMar 10, 2024

Final Answer :

A

Explanation :

The real rate of interest is calculated by subtracting the inflation rate from the nominal rate of interest, to adjust for the effects of inflation on purchasing power.

## Learning Objectives

- Clarify the differences between nominal, real, and inflation rates, and compute the return rate in real terms.