Question

The nominal interest rate on your savings account is 9.14 %, whereas the inflation rate is...

The nominal interest rate on your savings account is 9.14 %, whereas the inflation rate is 7%. What is the real interest rate when you calculate it with the "exact formula"?

A. 2.14% B. 2.30% C. 2% D. 1.5%

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Homework Answers

Answer #1

> Formula

Real interest rate = [ 1 + Nominal rate ] / [ 1 + Real rate ]   - 1

> Calculation

Real interest rate = [ 1 + 0.0914 ] / [ 1 + 0.07 ]   - 1

                          = 1.0914 / 1.07 - 1

                         = 1.02 - 1

                        = 0.02 or 2 % Answer

The option C is correct.

Hope you understand the solution.

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