Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 3.5% over the same period. The exact actual growth rate of your purchasing power was
A) 15.55%.
B) 4.35%.
C) 5.02%.
D) 4.81%.
E) 15.04%.

Question

Quizplus · Accepted Answer

The actual growth rate of purchasing power can be calculated using the formula for the real rate of interest: (1 + nominal rate) / (1 + inflation rate) - 1. Plugging in the given values: (1 + 0.08) / (1 + 0.035) - 1 = 1.08 / 1.035 - 1 ≈ 0.0435 or 4.35%.

Over the Past Year, You Earned a Nominal Rate of Interest