Walter puts money in a savings account at his bank earning 3.5 percent.One year later he takes his money out and notes that while his money was earning interest,prices rose 1.5 percent.Walter earned a nominal interest rate of
A)3.5 percent and a real interest rate of 5 percent.
B)3.5 percent and a real interest rate of 2 percent.
C)5 percent and a real interest rate of 3.5 percent
D)5 percent and a real interest rate of 2 percent

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate at which Walter's savings account earned interest, which is 3.5 percent.

The real interest rate takes inflation into account and measures the purchasing power of Walter's earnings. To calculate the real interest rate, we subtract the inflation rate from the nominal interest rate:

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 3.5% - 1.5%

Real interest rate = 2%

Therefore, Walter earned a nominal interest rate of 3.5 percent and a real interest rate of 2 percent. The correct answer is B.

Walter Puts Money in a Savings Account at His Bank