The rate of interest that would occur if there were no inflation is the

The rate of interest that would occur if there were no inflation is the

• A. real interest rate
• B. nominal interest rate
• C. effective rate
• D. market rate

Answer: (A)

This question tests the distinction between real and nominal interest rates. The real interest rate is the return you would earn after removing the effect of inflation; it’s roughly the nominal rate minus expected inflation. If there were no inflation, the adjustment is zero, so the nominal rate would equal the real rate. Therefore, the rate that would occur in a zero-inflation environment is the real interest rate. The nominal rate is the stated rate that includes inflation, the effective rate accounts for compounding, and the market rate is simply the going rate in the market.

This question tests the distinction between real and nominal interest rates. The real interest rate is the return you would earn after removing the effect of inflation; it’s roughly the nominal rate minus expected inflation. If there were no inflation, the adjustment is zero, so the nominal rate would equal the real rate. Therefore, the rate that would occur in a zero-inflation environment is the real interest rate. The nominal rate is the stated rate that includes inflation, the effective rate accounts for compounding, and the market rate is simply the going rate in the market.