Question

Suppose Frankie is a consumer in the simple economy from questions 1 and 2. He has sent you an email with some

account options that he's considering for saving his money. He knows the nominal interest rates for the accounts and
wants to make sure he understands what his real return will be, considering the inflation rate calculated from question 2.
Which phrase in Frankie's email incorrectly identifies the real rate of return?
Select the correct text in the passage.
Hey! I was wondering if you could look over these options for me. I'm looking at a savings account at Chapman
Bank with a nominal interest rate of 2%, so my real interest rate will be negative. Bank StarOne offers an
account with a stated interest rate of 3%, so my real return will be 5.22%. I'm also looking at a couple of options
at a credit union: one with a nominal rate of 3% (so the real rate is 0.78%) and one that states a rate of 4% (a
real rate of 1.78%).
What do you think of these? Let me know your thoughts.

Answer 1

Answer: I think that all of these are valid and sufficiently considered offers in my opinion. Nothing out of the sort.

Explanation: Hope this helped! Have a STUPENDOUS day! <3

Answer 2

Answer: my real return will be 5.22%

Explanation: The nominal rate of return is the stated interest rate on an account. The real rate of return describes the actual return after inflation is considered.

The relationship between the nominal rate of return and the real rate of return is shown by this equation:

real interest rate = nominal interest rate − rate of inflation.

From questions 1 and 2, we know that this simple economy has an inflation rate of 2.22%.

The account at Bank StarOne has a stated, or nominal, interest rate of 3%. So, this would be the real rate of return:

3% − 2.22% = 0.78%.

Frankie incorrectly identifies the real return on this account as 5.22% because he added the inflation rate instead of subtracting it.

Hope this helped! :)