Suppose you have $400 and the inflation rate is 5 percent. In order to earn a real return of $16 on your investment, the nominal interest rate needs to be near

Question

Quizplus · Accepted Answer

To calculate the nominal interest rate needed to earn a real return of $16, we must first adjust the starting amount of $400 for inflation by multiplying it by (1 + inflation rate) which is (1 + 0.05) = 1.05. This gives us $420.

Next, we can use the formula: nominal interest rate = real interest rate + inflation rate 
where real interest rate = $16 / $400 = 0.04 or 4%

Plugging in these values, we get: 
nominal interest rate = 0.04 + 0.05 = 0.09 or 9%

Therefore, the correct answer is D, a nominal interest rate near 9%.

Suppose You Have $400 and the Inflation Rate Is 5