Question

What's your real rate of return if your savings account pays 2.5% interest and inflation is at 1%? 0 A. 1.5%. О в. 2.5%. • с. 3.5%. OD. Can't calculate.

Answer 1

The real rate of return is found by subtracting the inflation rate from the nominal interest rate. In this case, it is 2.5% - 1%, equalling a real rate of return of 1.5%, making the correct answer A. 1.5%.

Step-by-step explanation:

The question asks to calculate the real rate of return if a savings account pays 2.5% interest and inflation is at 1%. To find the real rate of return, you deduct the rate of inflation from the nominal interest rate. In this case, the calculation would be 2.5% - 1%, resulting in a real rate of return of 1.5%.

Therefore, the correct answer to the question is A. 1.5%.

The concept of the real rate of return is crucial because it indicates the actual growth in purchasing power that an investment provides after accounting for inflation. Without considering inflation, the nominal interest rate can be misleading as it doesn't represent the true increase in wealth.