The real rate of interest:
a. does not account for the effects of inflation.
c. is inversely related to the national rate of interest
b. does account for the effects of inflation
d. is both a and
b.

The correct answer is C.

The real rate of interest is defined as the amount that a lender or investor receives as a retribution after adjusting the nominal rate to remove the effect that inflation would cause on those earnings.

The following formula, known as the Fisher Equation, needs to be applied for the abovementioned adjustment. It establishes the relationship between real and nominal interests rates, in terms of inflation.

r = i - π

where,

r= real interest rate

i= norminal interest rate

π = inflation rate

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