Explanation

According to economic theory, the real risk-free interest rate represents the rate that reflects only the time preferences of individuals for current versus future real consumption. This rate compensates investors for deferring consumption and is not affected by inflation expectations or liquidity preferences.

Key Concepts:

1. Real Risk-Free Rate: This is the pure time value of money, representing compensation for deferring consumption without considering inflation or other risks.
2. Liquidity Premium: An additional return required by investors for holding less liquid assets.
3. Nominal Risk-Free Rate: Real risk-free rate + expected inflation.

Given Information:

• Liquidity premium = 2%
• Real risk-free interest rate = 4%

Analysis:

• The question asks for the rate that only reflects time preferences for current vs. future real consumption
• This is precisely the definition of the real risk-free interest rate
• The liquidity premium (2%) is an additional component for liquidity risk, not pure time preference
• The 6% would represent a combination of real risk-free rate and liquidity premium

Conclusion:

The correct answer is 4%, which is the real risk-free interest rate that reflects pure time preferences for consumption.