If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate? a) 0.5%
b) 1.25%
c) 4.5%
d) none of above is correct

a) 0.5%

Explanation:

The real interest rate is simply the nominal interest rate adjusted for inflation.

Real interest rate = Nominal rate - Inflation

= 2.5 - 2

= 0.5%

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