A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?
A) 4.1%
B) 2.5%
C) 2.9%
D) 1.6%

Question

Quizplus · Accepted Answer

The real rate of return adjusts the nominal interest rate (5.7%) for the effects of inflation (1.6%). Using the approximation formula for real return = nominal rate - inflation rate, we get 5.7% - 1.6% = 4.1%.

A Year Ago, You Invested $2,500 in a Savings Account