AP Macroeconomics : Real Interest Rate

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Real Interest Rate

The real interest rate can be approximated by the Fisher equation:

What is the exact formula for the real interest rate?

Possible Answers:

The Fisher equation always gives the exact real interest rate. 

Correct answer:


The real interest rate is defined as the nominal appreciated value of assets divided by the new price level of the assets. The nominal appreciated value is simply , while the new price level is equal to . This gives the real appreciated value of assets. We then subtract 1 to get the real interest rate. 

Example:  (according to the Fisher equation)

The Fisher equation comes close, but is not actually correct.

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