Question

You are pleased to see that you have been given a 5.44% raise this year.​ However, you read on the Wall Street Journal Web site that inflation over the past year has been 2.29%. How much better off are you in terms of real purchasing​ power?

Answer 1

3.08%

Step-by-step explanation:

Use the Fisher equation that explains the relationship between nominal interest rate, real interest rate and inflation rate.

Nominal rate is the rate earned before deducting the inflation rate whereas the Real interest rate is the inflation adjusted interest rate.

The Fisher equation; (1+Nominal )/ (1+inflation) = (1+Real)

Nominal rate = 5.44% or 0.0544

Inflation rate = 2.29% or 0.0229

(1+0.0544) / (1+0.0229) = (1+Real)

1.0308 = (1+Real)

Subtract 1 from both sides;

1.0308 -1 = Real

0.0308 = Real

As a percentage, the Real purchasing power increase by 3.08%