Over the past year, you earned a nominal rate of interest of 8% on your money.The inflation rate was 4% over the same period.The exact actual growth rate of your purchasing power was
A)15.5%.
B)10.0%.
C)3.8%.
D)4.8%.

Question

Quizplus · Accepted Answer

To calculate the actual growth rate of purchasing power, we need to subtract the inflation rate from the nominal interest rate and then adjust for compounding. Thus, the exact actual growth rate is:
(1 + 0.08)/(1 + 0.04) - 1 = 1.038 - 1 = 0.038 or 3.8%.
Therefore, the correct choice is C.

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