2.5 If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?

2.5

Explanation:

Real interest rate is the interest rate that has been adjusted for the effect inflation.

Nominal interest rate hasn't been adjusted for the effects of inflation. It is the one more popularly quoted .

Inflation is the rise in general price level.

Real interest rate = nominal interest rate - expected inflation rate

4.25 - 1.75 = 2.5

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