Define the Term The Real Interest Rate Is the Nominal Interest Rate Adjusted

question 30

Short Answer

Define the term
The real interest rate is the nominal interest rate adjusted for inflation.We do not observe it directly (except for the case of U.S.Treasury TIPS).The relationship between the two is given by
1 + r_nominal = (1 + r_{real rate})(1 + inflation rate).(An approximate formula that works for small
values is: r_nominal = r_{real rate} + inflation rate.)

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