Interest Rate & Rate of Return

Interest rate denoted as $i$, also called nominal interest rate.

Approximately,

Real interest rate=Nominal interest rate i - expected inflation rate ${\pi}^{e}$

Precisely,

$1+i=(1+r)(1+{\pi}^{e})$

  • The "real interest rate" in an economy is often the rate of return on a risk free investment, such as US Treasury notes, minus an index of inflation, such as the CPI, or GDP deflator.1
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