You plan to make annual deposits into a bank account that pays a 5.00% nominal annual rate.You think inflation will amount to 2.50% per year.What is the expected annual real rate at which your money will grow?

Question

Quizplus · Accepted Answer

The expected annual real rate of growth can be calculated using the Fisher equation, which is (1 + nominal rate) / (1 + inflation rate) - 1. Plugging in the given values: (1 + 0.05) / (1 + 0.025) - 1 = 1.02439 - 1 = 0.02439 or 2.44%.

You Plan to Make Annual Deposits into a Bank Account