The real interest rate represents:

The real interest rate represents:

• A. The nominal rate adjusted for taxes
• B. The nominal rate plus inflation
• C. The nominal rate minus the inflation rate
• D. The nominal rate adjusted for risk

Answer: (C)

Real interest rate shows how much your purchasing power changes from lending or borrowing once inflation is taken into account. It is found by subtracting the rate of inflation from the nominal interest rate. For example, if the nominal rate is 6% and expected inflation is 2%, the real rate is about 4%, meaning your buying power grows by 4% in real terms. If inflation exceeds the nominal rate, the real rate is negative, indicating a loss in purchasing power. This differs from adjusting for taxes or risk, or from adding inflation to the rate, because those approaches change the nominal figure or account for other factors, whereas the real rate specifically reflects the effect of inflation on purchasing power.

Real interest rate shows how much your purchasing power changes from lending or borrowing once inflation is taken into account. It is found by subtracting the rate of inflation from the nominal interest rate. For example, if the nominal rate is 6% and expected inflation is 2%, the real rate is about 4%, meaning your buying power grows by 4% in real terms. If inflation exceeds the nominal rate, the real rate is negative, indicating a loss in purchasing power. This differs from adjusting for taxes or risk, or from adding inflation to the rate, because those approaches change the nominal figure or account for other factors, whereas the real rate specifically reflects the effect of inflation on purchasing power.