Questions: The nominal interest rate is the real interest rate minus the inflation rate. True False

The nominal interest rate is the real interest rate minus the inflation rate. True False
Transcript text: 10 Question 5 (2 points) $\checkmark$ Saved The nominal interest rate is the real interest rate minus the inflation rate. Page 2: $11 \quad 12$ True False Page 3:
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Solution

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The statement provided in the question is incorrect. The nominal interest rate is actually the sum of the real interest rate and the inflation rate, not the difference.

The correct relationship is given by the formula:

\[ \text{Nominal Interest Rate} = \text{Real Interest Rate} + \text{Inflation Rate} \]

Therefore, the answer is:

False

Explanation:

  • The nominal interest rate is the rate of interest before adjusting for inflation. It reflects the total amount of interest paid or earned.
  • The real interest rate is the nominal rate adjusted for inflation, representing the true cost of borrowing or the true yield on an investment.
  • The formula shows that to find the nominal rate, you add the real interest rate to the inflation rate, not subtract it.
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