Economics Time Value Of Money Questions Medium
The concept of real interest rate in the context of time value of money refers to the adjusted interest rate that takes into account the effects of inflation. It represents the rate at which the purchasing power of money increases over time.
Inflation erodes the value of money over time, meaning that the same amount of money will be able to buy fewer goods and services in the future. To account for this, the real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.
By considering the real interest rate, individuals and businesses can make more informed financial decisions. It allows them to assess the true return on their investments or loans, taking into account the impact of inflation. This is important because it helps to determine the actual value of money over time and enables individuals to make better financial plans and investment strategies.