Question

your savings account yielded 1.5% last year. the inflation rate was 2%. what real return did you earn on this account. round your answer to the nearest tenth of a percent

Answer 1

Solution:

The formula for calculating the real rate of return is =

( 1 + Real Rate ) = ( 1 + Nominal Rate ) / ( 1 + Inflation rate )

As per the information given in the question we have

Nominal Rate = 1.5 % = 0.015

Inflation rate = 2 % = 0.02                                      

Real Rate = To find

Applying the above values in the formula we have

1 + Real rate = ( 1 + 0.015 ) / ( 1 + 0.02 )

1 + Real rate = ( 1.015 ) / ( 1.02 )

1 + Real rate = 0.9951                                 

Real rate = 0.9951 – 1 = - 0.0049

= - 0.49 %

= - 0.5 % ( When rounded off to the nearest tenth of a percent )

Thus the real rate of return on this account = - 0.5 % .