Economics: Principles, Problems, and Policies, 19th Edition

Published by McGraw-Hill Education
ISBN 10: 0073511447
ISBN 13: 978-0-07351-144-3

Chapter 14 - Rent, Interest, and Profit - Questions - Page 310: 10

Answer

The nominal interest rate is the interest rate unadjusted for inflation. The real interest rate is the nominal interest rate adjusted for inflation. The real interest rate is better for investment decisions because it reflects true costs in borrowing money. Real interest rate = (12 percent - 8 percent)= 4 percent.

Work Step by Step

This question asks you to understand that the real interest rate is adjusted for inflation and to understand that you have to account for the time-value of money and for inflation.
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