Mr. X invests $1,000 at a 10 percent nominal rate for one year. If the inflation rate is 4 percent, what is the real value of the investment at the end of one year?
A)$1,100
B)$1,000
C)$1,058
D)$1,040

Question

Quizplus · Accepted Answer

Nominal rate = 10%
Inflation rate = 4%
Real rate = (1+nominal rate)/(1+inflation rate)-1
= (1+0.1)/(1+0.04)-1
= 0.058 or 5.8%
Real value of the investment = $1,000 * (1+0.058) = $1,058. Answer: C.

Mr X Invests $1,000 at a 10 Percent Nominal Rate