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Real Interest Rate

The real interest rate is the nominal interest rate minus the rate of inflation. It is the rate at which the purchasing power of money invested is expected to increase over time, after accounting for inflation. The real interest rate represents the true cost of borrowing or the true return on investment, adjusted for the effect of inflation.

For example, if the nominal interest rate is 5% and the rate of inflation is 2%, the real interest rate would be 3%. This means that if you invested $100 at a 5% nominal interest rate, the value of your investment would increase to $105, but due to inflation, the purchasing power of your money would only increase by 3% in real terms.

It is important to consider the real interest rate when making investment decisions or setting monetary policy, as it provides a more accurate picture of the true cost or return of borrowing or investing, taking into account the effect of inflation on the purchasing power of money.

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