Suppose you have $400 and the inflation rate is 4 percent. In order to earn a real return of $20 on your investment, the nominal interest rate must be

Question

Quizplus · Accepted Answer

To calculate the nominal interest rate, we need to first calculate the future value of our investment with 4% inflation rate.

Future value = Present value * (1 + inflation rate) 
Future value = $400 * (1 + 0.04) 
Future value = $416

Now, we need to find out what nominal interest rate would give us a real return of $20.

Real return = Nominal interest rate - Inflation rate 
$20 = Nominal interest rate - 0.04

Nominal interest rate = 0.04 + $20 
Nominal interest rate = 0.09 or 9%

Therefore, the answer is choice C.

Suppose You Have $400 and the Inflation Rate Is 4