An investment of $1,000 in the bank at an annual interest rate of 4% at the same time that prices rise by 2.5% generates a real return of:
A) 1.5%.
B) 2.5%.
C) 4%.
D) 6.5%.

Question

Quizplus · Accepted Answer

Real return is the return on investment adjusted for inflation. 
Real return = (1 + nominal return)/(1 + inflation rate) - 1
Nominal return = 4%
Inflation rate = 2.5%
Real return = (1 + 0.04)/(1 + 0.025) - 1 = 0.015 or 1.5%
Therefore, the real return on the investment is 1.5%.

An Investment of $1,000 in the Bank at an Annual