How does the real rate of return differ from the nominal rate of return?Question 3AnswerA.Real rate accounts for inflation, while nominal rate does notB.Real rate includes taxes, while nominal rate does notC.Nominal rate includes taxes, while real rate does notD.Nominal rate accounts for inflation, while real rate does not
Question
How does the real rate of return differ from the nominal rate of return?Question 3AnswerA.Real rate accounts for inflation, while nominal rate does notB.Real rate includes taxes, while nominal rate does notC.Nominal rate includes taxes, while real rate does notD.Nominal rate accounts for inflation, while real rate does not
Solution
The correct answer is A. Real rate accounts for inflation, while nominal rate does not.
Here's why:
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Nominal Rate of Return: This is the rate of return on an investment without considering the effects of inflation. It represents the percentage increase in the value of an investment, ignoring any external factors that might reduce the purchasing power of the money generated by the investment.
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Real Rate of Return: This is the annual percentage return realized on an investment, adjusted for changes in prices due to inflation. The real rate of return reveals the change in purchasing power of the investment.
So, the key difference between the two is that the real rate of return takes into account inflation, while the nominal rate of return does not.
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