Question

Which of the following statements accurately explain why international investors need to watch the real interest rate as opposed to the nominal interest rate? Check all that apply. The real interest rate equals the nominal interest rate plus the inflation rate. The nominal interest rate refers to the interest rate, unadjusted for inflation. The nominal interest rate refers to the interest rate, adjusted for inflation. The real interest rate equals the nominal interest rate minus the inflation rate.

Answer 1

Answer:

The nominal interest rate refers to the interest rate, unadjusted for inflation.

The real interest rate equals the nominal interest rate minus the inflation rate.

Explanation:

The nominal interest rate is equal to the real interest rate plus the expected inflation rate. As a result, the nominal interest rate is an estimated figure, that tries to account for inflation, but because inflation is a number that cannot be fully predicted, it is a rate that is less accurate than the real interest rate, which takes into account the real inflation rate.

Because inflation is a variable that determines whether the investors earn a return or not (if the inflation rate is higher than the real interest rate, the investors actually lose closely), investors must watch closely this rate, because it is the one that actually determines the future of their investments.