The nominal interest rate minus the expected rate of inflation ---

A defines real interest rate
B is a less accurate measure of the incentives to borrow
C is a less accurate indicator of tightness of credit market
D defines discount rate

Correct Answer: defines real interest rate

The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.
Bissoy MCQ
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