Over the past year, you earned a nominal rate of interest of 12.5% on your money. The inflation rate was 2.6% over the same period. The exact actual growth rate of your purchasing power was
A) 9.15%.
B) 9.90%.
C) 9.65%.
D) 10.52%.

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 + 0.125}{1 + 0.026} - 1 = \frac{1.125}{1.026} - 1 \approx 0.0965 $ or 9.65%.

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