4. the real interest rate equals the inflation rate minus nominal interest rates nominal interest rates minus the inflation rate nominal interest rates plus the inflation rate the actual interest rate over the period of the investment

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

Explanation:

Interest rate simply refers to a proportion of the borrowed money that is charged to the borrower.

So, in an ideal situation with zero inflation, if a borrower gets $100 with a nominal interest rate of 10%, he should pay $10 in interests by the end of the period, so the lender will get his $100 back, plus $10, or 10% of the money borrowed. He ended up with a higher monetary value, having used a real interest rate of 10%.

Let's now say that the inflation rate is 10%. The borrower gets $100 with a nominal interest rate of 10% and an inflation rate of 10%. In this case, he should still pay $10 in interests by the end of the period. The lender will get his $100 back, plus $10 of interests, and even so, he will still end up with the same monetary value as before! He won't be able to buy any more things with $110 now than he was able to buy with $100 before, so his real return was 0%.

This happens because when there is an inflation rate of 10%, the monetary value of $100 equals the monetary value of $110 at the end of the period, so you actually need more money to compensate.Now, let's say the nominal interest rate is 10%, with an inflation rate of 5%. The borrower would have to pay $10 in interests, so the lender gets his $100 back, plus $10. Since the value of $100 of before equals $105 in the present, and he got $110, he gained some monetary value, but how much? We determine his return with the real interest rate:

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