Over the past year, you earned a nominal rate of interest of 8% on your money.The inflation rate was 3.5% over the same period.The exact actual growth rate of your purchasing power was
A)15.55%.
B)4.35%.
C)5.02%.
D)4.81%.

Question

Quizplus · Accepted Answer

The actual growth rate of purchasing power can be calculated using the formula for the real rate of interest: $ \text{Real Rate} = \frac{1 + \text{Nominal Rate}}{1 + \text{Inflation Rate}} - 1 $. Substituting the given values, $ \frac{1 + 0.08}{1 + 0.035} - 1 = \frac{1.08}{1.035} - 1 = 1.0435 - 1 = 0.0435 $ or 4.35%.

Over the Past Year, You Earned a Nominal Rate of Interest