Question

24. To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

A. add; default premium to the
B. subtract; default premium from the
C. add; expected inflation to
D. subtract; expected inflation from

Answer 1

The correct answer is D. subtract the expected inflation from the nominal risk-free rate. To obtain an approximate estimate of the real interest rate, economists subtract the expected inflation from the nominal risk-free rate.

Step-by-step explanation:

The correct answer is D. subtract the expected inflation from the nominal risk-free rate.

To obtain an approximate estimate of the real interest rate, economists subtract the expected inflation from the nominal risk-free rate. The real interest rate accounts for the effect of inflation, as it represents the purchasing power of money after considering the rate of inflation. By subtracting the expected inflation, economists can isolate the real interest rate and analyze its impact on borrowing and lending.

For example, if the nominal risk-free rate is 5% and the expected inflation is 2%, the approximate estimate of the real interest rate would be 3% (5% - 2% = 3%). This helps individuals and businesses make financial decisions based on the true cost of borrowing or the return on investments.