The real interest rate is 1.75%.
After accounting for inflation, the real interest rate shows the purchasing power of the interest collected. It assists us in comprehending the genuine rise in purchasing power of an investment or savings account.
In this situation, a real interest rate of 1.75% means that the investment's purchasing power improves by 1.75% after accounting for inflation.
Subtracting the rate of inflation from the nominal interest rate yields the real interest rate.
In this scenario, the nominal interest rate is 4.00%, but the inflation rate is 2.25%.
Real interest rate = Nominal interest rate - Inflation rate
= 4.00% - 2.25%
= 1.75%
Therefore, the real interest rate is 1.75%.