Over the past year, you earned a nominal rate of interest of 10% on your money.The inflation rate was 5% over the same period.The exact actual growth rate of your purchasing power was
A)15.5%.
B)10.0%.
C)5.0%.
D)4.8%.

Question

Quizplus · Accepted Answer

The actual growth rate of purchasing power is calculated using the formula for the real rate of interest: $ \text{Real Rate} = \frac{1 + \text{Nominal Rate}}{1 + \text{Inflation Rate}} - 1 $. Substituting the given values (Nominal Rate = 10% or 0.10, Inflation Rate = 5% or 0.05) gives $ \frac{1 + 0.10}{1 + 0.05} - 1 = \frac{1.10}{1.05} - 1 = 1.047619 - 1 = 0.047619 $, or 4.76%, which rounds to 4.8%.

Over the Past Year, You Earned a Nominal Rate of Interest