Real Interest Rate
The real interest rate is the rate of interest an investor receives after the effects of inflation have been taken into account. It is the rate of return an investor can expect to receive after adjusting for the effects of inflation. The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. For example, if an investor receives a nominal interest rate of 5% and the inflation rate is 3%, then the real interest rate is 2%.
History of Real Interest Rate
The concept of real interest rate was first introduced by the economist Irving Fisher in the early 1930s. Fisher argued that the nominal interest rate was not a good measure of the true cost of borrowing money, as it did not take into account the effects of inflation. He proposed that the real interest rate should be used instead, as it was a more accurate measure of the true cost of borrowing money.
Since then, the real interest rate has become an important tool for economists and investors alike. It is used to measure the cost of borrowing money, as well as to compare the returns on different investments. It is also used to measure the health of an economy, as it can provide an indication of the level of demand for goods and services.
Table of Comparisons
| Nominal Interest Rate | Inflation Rate | Real Interest Rate |
|---|---|---|
| 5% | 3% | 2% |
| 7% | 4% | 3% |
| 10% | 6% | 4% |
Summary
The real interest rate is an important tool for economists and investors alike. It is used to measure the cost of borrowing money, as well as to compare the returns on different investments. It is calculated by subtracting the inflation rate from the nominal interest rate. For more information about the real interest rate, you can visit websites such as Investopedia, The Balance, and The Motley Fool.
See Also
- Nominal Interest Rate
- Inflation Rate
- Interest Rate Risk
- Time Value of Money
- Risk-Free Rate
- Real Return
- Opportunity Cost
- Discount Rate
- Expected Return
- Risk Premium
