The nominal interest rate minus the rate of inflation equals which of the following?

• A. The future value
• B. The present value factor
• C. The real interest rate
• D. The effective annual rate

Answer: (C)

Verified step by step guidance

1. Understand the concept of nominal interest rate: The nominal interest rate is the stated interest rate on a financial instrument, not adjusted for inflation.
2. Understand the concept of inflation rate: Inflation rate measures the percentage increase in the general price level of goods and services over a period of time.
3. Learn the formula for real interest rate: The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Mathematically, it can be expressed as: $r=i-\pi$, where $r$ is the real interest rate, $i$ is the nominal interest rate, and $\pi$ is the inflation rate.
4. Recognize that the real interest rate represents the true cost of borrowing or the true return on investment after accounting for inflation.
5. Conclude that the nominal interest rate minus the inflation rate equals the real interest rate, as stated in the problem.