Q:

How do you calculate real interest rates?

A:

Quick Answer

Real interest rate is calculated by adjusting for the effects of inflation when compared to the nominal interest rate. The calculation formula is simple, as it only requires subtracting the rate of inflation from the nominal interest rate. The value left after subtraction is the real interest rate.

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Full Answer

The real interest rate provides information that reflects both the real yield to the lending individual or institution as well as the real cost of the funds being borrowed. The real interest rate also allows individuals to determine the real value of their savings and their real purchasing power after considering inflation.

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