You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%?

Question

Quizplus · Accepted Answer

To calculate the real rate of return, we subtract the inflation rate from the advertised rate of return. In this case: 
Real rate of return = 1.75% - 1.9% = -0.15%

This means that the actual purchasing power of your investment is decreasing, meaning you are losing money in real terms. Therefore, the best choice would be not to invest in this certificate of deposit or to look for an investment with a higher real rate of return.

You Purchase a Certificate of Deposit That Earns an Advertised