Question

You deposit $509 in a savings account and one year later you have $562. At the same time, the CPI increases from 126 to 143. What was your real interest rate, in percentage terms?

Answer 1

Answer:

real interest rate = -3.08%

Explanation:

real interest rate = nominal rate - inflation rate

• nominal interest rate = [($562/$509) - 1] x 100 = 10.41%
• inflation rate = [(143/126) - 1] x 100 = 13.49%

real interest rate = 10.41% - 13.49% = -3.08%

since the real interest rate is negative, the investor actually lost money in real dollars. This means that the amount of goods that the investor could purchase before making the investment is higher than the amount of goods he/she will be able to buy after the investment.