Question

What is the real interest rate?

Answer 1

The real interest rate is the actual return an individual receives after accounting for inflation. It is calculated by subtracting the rate of inflation from the nominal interest rate. In simple terms, i = R − π, where R is the real interest rate, i is the nominal interest rate, and π represents the inflation rate.

When we take loans from the government or deposit money in banks, we often get attracted to high nominal interest rates. However, it is important to understand that the real interest rate is what truly matters, as it reflects the actual value of the return.