Question

In 1974, interest rates were 7.782% and the rate of inflation was 12.299% in Canada. What was the real interest rate in 1974? How would the purchasing power of your savings have changed over the year?

**please list out step by step actions, please show the formulas used, please DONT USE excel**

Answer 1

In 1974, interest rates were 7.782% and the rate of inflation was 12.299% in Canada. What was the real interest rate in 1974? How would the purchasing power of your savings have changed over the year?

The real interest rate = (1 + interest rates)/(1 + rate of inflation) - 1

The real interest rate = (1 + 0.07782)/(1 + 0.12299) - 1

The real interest rate = -0.04022297616

The real interest rate = -4.022297616%

The purchasing power has decreased over the year because the real interest rate is negative.