On January 1, 2008, Edward invested $10,000 at 5 percent interest for one year. The CPI on January 1, 2008 stood at 1.60. On January 1, 2009, the CPI was 1.76. The real rate of interest earned by Edward was ________ percent.
A)-5
B)0
C)5
D)10

Question

Quizplus · Accepted Answer

The real rate of interest equals the nominal rate of interest minus inflation. In this case, the real rate was -5 percent because the inflation rate was 10 percent from 2008 to 2009: (1.76 - 1.60)/ 1.6 = 0.10 or 10 percent.

On January 1, 2008, Edward Invested $10,000 at 5 Percent