Monte wants to make an investment that will have a real growth rate of 6%. If the current inflation rate is 2.5%, what annual interest rate will he need to get on his investment to accomplish his goal?
A) 8.65%
B) 9.40%
C) 14.67%
D) 15.82%

Question

Quizplus · Accepted Answer

To achieve a real growth rate of 6% with an inflation rate of 2.5%, Monte needs to use the formula for the nominal interest rate: (1 + real interest rate) * (1 + inflation rate) - 1. Plugging in the numbers: (1 + 0.06) * (1 + 0.025) - 1 = 1.06 * 1.025 - 1 = 1.0865 - 1 = 0.0865 or 8.65%.

Monte Wants to Make an Investment That Will Have a Real