Final answer:
The real rate of interest is the nominal rate minus the inflation rate. For example, if the nominal interest rate is 7% and the inflation rate is 3%, then the real interest rate would be 4%.
Step-by-step explanation:
The real rate of interest is approximately equal to the nominal rate minus the inflation rate.
For example, if the nominal interest rate is 7% and the inflation rate is 3%, then the real interest rate would be 4%. This means that the borrower is effectively paying a 4% interest rate after taking inflation into account.
On the other hand, if there is deflation of 2%, then the real interest rate would be 9%. In this case, the borrower would be paying a higher interest rate due to the unexpected deflation.