Question

Susan put her savings into a mutual fund that paid a nominal interest rate of 3 percent a year at the beginning of 2005. the cpi was 225 at the beginning of the year and 232 at the end of the year. susan earned a real interest rate of _____ percent a year. round your answer up to the second decimal.

Answer 1

-0.11% per year

Step-by-step explanation:

Here, we want to calculate real interest rate.

Firstly, we calculate the inflation rate

mathematically the inflation rate = (cpi at the end of year - cpi at the beginning of year)/cpi at the beginning of year * 100%

Inflation rate = (232-225)/225 * 100% = 3.11%

we now proceed to calculate the real interest rate

mathematically, real interest rate = Nominal interest rate - inflation rate

from the question, nominal interest rate = 3%

real interest rate = 3% - 3.11% = -0.11%

This means that the real interest rate earned by sally is -0.11% per year