Question

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation rate to be 5 percent or lower, then calculate the real interest rate you are expecting to earn.

Answer 1

Real interest rate= 3%

Explanation:

Giving the following information:

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. The inflation rate is 5 percent.

The effect of the inflation rate on the interest rate is counterproductive. The inflation rate diminishes purchasing power.

Real interest rate= nominal interest rate - inflation rate

Real interest rate= 0.08 - 0.05= 0.03