What is the expected real rate of interest for an account that offers a 12 percent nominal rate of return when the rate of inflation is 6 percent annually?
A)5.00 percent
B)5.66 percent
C)6.00 percent
D)9.46 percent 1 + real rate = 1.12/1.06

Question

Quizplus · Accepted Answer

To calculate the expected real rate of interest, we subtract the inflation rate from the nominal rate of return. Therefore, the expected real rate of interest for this account is 12% - 6% = 6%. However, we need to adjust for the effects of inflation on the purchasing power of our money, so we need to calculate the inflation-adjusted return.

The formula for calculating the inflation-adjusted return is: 
(1 + nominal rate) / (1 + inflation rate) - 1

Using the values given in the question: 
(1 + 0.12) / (1 + 0.06) - 1 = 0.0566 or 5.66%

Therefore, the expected real rate of interest for this account is 5.66%. The best choice is B.

What Is the Expected Real Rate of Interest for an Account