Explanation: An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.
Another concept attached to Real Interest Rate is Negative real interest rate.
When inflation is higher than the interest rate, the real interest rate becomes negative. Example: If the one year interest rate is 8% and average inflation over this period is 10% then the real interest rate is negative by 2%.
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