Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was
A) 11.76%.
B) 16.00%.
C) 15.02%.
D) 14.32%.

Question

Quizplus · Accepted Answer

The actual growth rate of purchasing power can be calculated using the formula for the real rate of interest: $ \text{Real Rate} = \frac{1 + \text{Nominal Rate}}{1 + \text{Inflation Rate}} - 1 $. Plugging in the given values, $ \frac{1 + 0.14}{1 + 0.02} - 1 = \frac{1.14}{1.02} - 1 = 1.117647 - 1 = 0.117647 $, or 11.76%.

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