Question

Say, your savings account pays 1% interest and inflation is at 0.5% what is your real rate of return?

Answer 1

Answer: Real Rate of return = 0.498% = 0.5%

Explanation:

Real rate of return = {(1 + nominal rate) / (1 + inflation rate)} - 1

In the questions

nominal interest rate = 1% (0.01)

Inflation rate = 0.5% (0.005)

Real Rate of return = {(1 + 0.01) / (1 + 0.005)} - 1

Real Rate of return = (1.01 / 1 .005) - 1

Real Rate of return = 1.004975 - 1

Real Rate of return = 0.004975

Real Rate of return = 0.498% = 0.5%