If your bank pays you a nominal interest rate of 2.5% on funds in your savings account and the rate of inflation is 4%, what is the real rate of return on your savings?

Question

Quizplus · Accepted Answer

The real rate of return is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the real rate of return is 2.5% - 4% = -1.5%. This means that the inflation rate is higher than the interest rate you are earning, so your purchasing power is actually decreasing over time.

If Your Bank Pays You a Nominal Interest Rate of 2.5