Question

If the nominal interest rate per year is 10% and the inflation rate is 4%, the real rate of interest is closest to

Answer 1

Answer:

Real interest rate= 0.06 = 6%

Explanation:

Giving the following information:

Nominal interest rate= 10%

Inflation rate= 4%

The real interest rate is the result of deducting from the nominal interest rate the inflation rate. Inflation has the opposite effect than the interest rate on the value of money through time.

Real interest rate= nominal interest rate - inflation rate

Real interest rate= 0.10 - 0.04

Real interest rate= 0.06