On January 1, 2015, Anna invested $5,000 at 5 percent interest for one year. The CPI on January 1, 2015 stood at 2.37. On January 1, 2016, the CPI was 2.40. The real rate of interest earned by Anna was ________ percent.

Question

On January 1, 2015, Anna invested $5,000 at 5 percent interest for one year. The CPI on January 1, 2015 stood at 2.37. On January 1, 2016, the CPI was 2.40. The real rate of interest earned by Anna was ________ percent.

Quizplus · Accepted Answer

The real rate of interest equals the nominal rate of interest minus inflation. In this case, the real rate was - 3.7 percent (5 percent - 1.3 percent)because the inflation rate was 1.3 percent from 2015 to 2016: (2.40 - 2.37)/ 2.37 = 0.013 or 1.3 percent.

On January 1, 2015, Anna Invested $5,000 at 5 Percent Interest