Question

In​ 1975, interest rates were 7.85 % and the rate of inflation was 12.3 % in the United States. What was the real interest rate in​ 1975? How would the purchasing power of your savings have changed over the​ year? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.) What was the real interest rate in​ 1975?   Real rate of interest in 1975 was nothing​%. ​(Round to two decimal​ places.)

Answer 1

The correct answer is -3.963%.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Interest rate = 7.85%

Rate of inflation = 12.3%

So, we can calculate the real interest rate by using the following method:

Real interest rate =[ (1 + Interest rate) ÷ ( 1 + inflation rate) ] - 1

By putting the value, we get,

Real interest rate =[ (1 + 0.0785) ÷ ( 1 + 0.123) ] - 1

= -3.963%

So, the purchasing power of your savings decreased by 3.963%.