In early 2002, the inflation rate was about 1.4%. If you invested in a savings account with an annual interest rate of 6.5%, what was the real growth rate of this investment?
A) 3.24%
B) 4.19%
C) 4.47%
D) 5.03%

Question

Quizplus · Accepted Answer

The real growth rate can be calculated using the formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate. Here, it is 6.5% - 1.4% = 5.1%. However, using the more precise formula: (1 + nominal rate) / (1 + inflation rate) - 1, we get (1.065 / 1.014) - 1 = 5.03%.

In Early 2002, the Inflation Rate Was About 1