On January 1, 2004, Edward invested $10,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.76. The real rate of interest earned by Edward was ______ percent.
A) -5
B) 0
C) 5
D) 10

Question

Quizplus · Accepted Answer

The real rate of interest is the nominal rate of interest minus the inflation rate. The nominal rate of interest is 5%. The inflation rate is (1.76 - 1.60) / 1.60 = 0.10. Therefore, the real rate of interest is 5% - 10% = -5%.

On January 1, 2004, Edward Invested $10,000 at 5% Interest