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.