Question

In​ 1975, interest rates were 7.85 % and the rate of inflation was 12.3 % in the United States. What was the real interest rate in​ 1975? How would the purchasing power of your savings have changed over the​ year? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Answer 1

Answer:

Since the real rate of interest is negative, this means that the purchasing power of the savings have decreased over the  year.

Explanation:

Data provided:

Interest rates = 7.85 %

The rate of inflation = 12.3 %

Now,

The Real interest rate is calculated as :

Real interest rate = Nominal interest rate - Inflation rate

on substituting the respective values, we get

Real interest rate = 7.85% - 12.3%

Or

The real interest rate = - 4.45%

Here,

Since the real rate of interest is negative, this means that the purchasing power of the savings have decreased over the  year.