Calculating Real Interest Rate: Example with 8% Nominal Rate and 3.5% Inflation

The real interest rate represents the actual return on an investment after accounting for inflation. It can be calculated by subtracting the expected inflation rate from the nominal interest rate.

Formula:

Real interest rate = Nominal interest rate - Expected inflation rate

Example:

If the nominal interest rate is 8% and the expected inflation rate is 3.5%, then the real interest rate is:

Real interest rate = 8% - 3.5% Real interest rate = 4.5%

Therefore, the correct answer is 4.5%.