Final answer:
The statement is false; the real interest rate is the nominal interest rate minus the inflation rate. For example, with a nominal rate of 7% and inflation of 3%, the real rate is 4%. Taxes on nominal interest without adjusting for inflation can further complicate the real rate calculation.
Step-by-step explanation:
The statement that the nominal interest rate plus the inflation rate equals the real interest rate is false. The correct formula is that the real interest rate is the nominal interest rate minus the inflation rate. For example, if the nominal interest rate is 7% and the rate of inflation is 3%, then the real interest rate is effectively 4%. This is because the inflation rate erodes the purchasing power of the money that is earned as interest. If there is deflation instead, which is a negative inflation rate, such as -2%, then the real interest rate would be higher than the nominal rate. This can result in a situation where the real burden of interest payments on borrowers increases, potentially leading to higher default rates and contributing to economic downturns. Moreover, factors like taxes can exacerbate the situation, as taxes are typically levied on nominal gains without accounting for the inflation rate, which can lead to taxation of non-existent real gains.