Over the past year you earned a nominal rate of interest of 3.6 percent on your money.The inflation rate was 3.1 percent over the same period.The exact actual growth rate of your purchasing power was
A)3.6%.
B)3.1%.
C)0.48%.
D)6.7%.
E)none of the above

Question

Quizplus · Accepted Answer

To find the actual growth rate of purchasing power, we need to adjust the nominal rate of interest for inflation. This is done using the real interest rate formula:

Real interest rate = Nominal interest rate - Inflation rate

Plugging in the given values, we get:

Real interest rate = 3.6% - 3.1% = 0.5%

This means that your purchasing power grew by 0.5% over the past year. However, we also need to account for compounding. If the interest was compounded annually, then the actual growth rate of your purchasing power would be:

(1 + Real interest rate) ^ (number of compounding periods) - 1

Assuming annual compounding, this gives:

(1 + 0.5%)^1 - 1 = 0.48%

Therefore, choice C is the correct answer.

Over the Past Year You Earned a Nominal Rate of Interest