A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%.What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?
A)1.5%
B)10%
C)7%
D)3%

Question

Quizplus · Accepted Answer

The real rate of return adjusts the observed (nominal) rate of return for inflation to reflect the actual increase in purchasing power. Here, the nominal rate is 5%, and inflation is 3.5%. The approximate real rate of return is calculated as the nominal rate minus the inflation rate: 5% - 3.5% = 1.5%.

A Year Ago, You Invested $10,000 in a Savings Account