Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent.At the end of the year prices have actually risen by 7 percent.Gladys earned a real rate of return of
A)Negative 2%.
B)2%.
C)5%.
D)7%.

Question

Quizplus · Accepted Answer

The real rate of return is calculated by subtracting the rate of inflation (7%) from the nominal rate of interest (5%): Real rate of return = Nominal rate of return - Inflation rate = 5% - 7% = -2%. Therefore, Gladys earned a negative real rate of return.

Gladys Agrees to Lend Kay $1,000 for One Year at a Nominal