Question

Use the following information to answer the next 6 questions. Suppose you have $1000 side money. You have two options: spend this money today, or save it for the future. You are offered the following investment opportunity that if you lend the $1000 out today, you will receive $1200 dollars one year later. You think this is a good deal, accept it, and lend your money out. To keep a track of the price level, you check the Bureau of Labor Statistics webpage, and find that the CPI for today is 100. Your nominal interest rate from this investment is

Answer 1

20%

Step-by-step explanation:

The nominal interest rate is the interest rate that you receive for a deposit or an investment without considering any type of adjustment due to inflation.

nominal interest rate = [(future value / present value) - 1] x 100 = [($1,200 / $1,000) - 1] x 100 = 0.2 x 100 = 20%

If you want to calculate the real interest rate, you must adjust your nominal interest rate by the period's inflation rate.