You open an investment account that earns a nominal interest rate of 3.1% per year. The current consumer price index is 205. In one year, the consumer price index is expected to go to 203. What is your expected real rate of return?
A)3.1%
B)4.08%
C)7.12%
D)-0.98%

Question

Quizplus · Accepted Answer

To find the expected real rate of return, we first need to calculate the inflation rate:

Inflation rate = ((203-205)/205) x 100% = -0.98%

Then, we can use the formula:

Real rate of return = nominal rate of return - inflation rate

Real rate of return = 3.1% - (-0.98%) = 4.08%

Therefore, the expected real rate of return is 4.08%, which corresponds to choice B.

You Open an Investment Account That Earns a Nominal Interest