The real interest rate is equal to the:

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Question: The real interest rate is equal to the:

Option 1: b. nominal interest rate plus the inflation rate.
- This mixes nominal rate with inflation additively in a way that inflates the rate further, which does not reflect how real rates are defined. Real interest rate is not formed by simply adding inflation to the nominal rate, so this overstates the purchasing power adjustments.

Option 2: d. nominal interest rate.
- If you only look at the nominal rate, you ignore the eroding effect of inflation. The real rate removes inflation to show true purchasing power change, so this answer omits an essential adjustment.

Option 3: A. amount of interest that a lender actually receives when making a loan.
- This describes the nominal payoff or gross interest, not the real rate. The real rate accounts for changes in price level, not just the dollar amount of interest, making this definition incomplete.

Option 4: c. nominal interest rate minus the inflation rate.
- This formulation captures the core idea of the Fisher relationship: real rate ≈ nominal rate minus expected inflation. By subtracting inflation from the nominal rate, you’re adjusting for the decline in purchasing power, yielding the real return to lenders and borrowers.

Summary of contrasts:
- Adding inflation (Option 1) incorrectly compounds inflation with the nominal rate.
- Using only the nominal rate (Option 2) ignores inflation altogether.
- Describing the lender’s actual dollar earnings (Option 3) misses the adjustment for price changes, which is central to real rate concepts.
- Subtracting inflation from the nominal rate (Option 4) aligns with standard real rate definitions and the intuitive idea of preserving purchasing power over time.

Thus, by evaluating how each option treats inflation and purchasing power, the only choice that matches the conventional definition of the real interest rate is the one that subtracts inflation from the nominal rate.

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The real interest rate is equal to the:

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Similar Questions

If the nominal interest rate is equal to 5%, and the inflation rate is equal to -5%, then what is the real interest rate?

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BU.220.610.51.FA25 M6 Quiz- Requires Respondus LockDown Browser

The real interest rate is equal to the:

View Explanation

Log in for full answers

Similar Questions

If the nominal interest rate is equal to 5%, and the inflation rate is equal to -5%, then what is the real interest rate?

Part 1Suppose you postpone consumption and invest at​ 6% when inflation is​ 2%. What is the approximate real rate of your reward for​ saving? Part 1 A. ​4% B. ​3% C. ​5% D. ​6%

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 10 percent and the inflation rate is 5 percent, the real interest rate is ______ percent.

A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?

You deposited your holiday bonus in your bank account on January 1, 2024. If the annual nominal interest rate is 4.3 percent and the inflation rate is 2.0 percent, you will earn ______ percent in real terms. Round your answer to the nearest tenth of a percent.

Finally, inflation rises to 6.5 percent and your bank adjusts the interest rate to 12.5 percent to maintain the same pre-tax interest rate (according to the Fisher equation). Calculate your real after-tax rate of return (in percent). Round your answer to the nearest tenth of a percent.

Suppose that you deposit money in your bank account on January 1, 2023. The annual nominal interest rate is 6.0 percent and the inflation rate is 3.3 percent. Your one-year real rate of return is ________ percent. Round your answer to the nearest tenth of a percent.

If inflation is 3% and the market interest rate charged for a loan (the nominal interest rate) is 7.2%, what is the 'real' interest rate?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving? Part 1 A. 4% B. 3% C. 5% D. 6%