If a person earns an 8 percent nominal rate of interest on his savings account in a year when inflation is 9 percent, the person's real rate of interest is
A) −1 percent.
B) 1 percent.
C) 8 percent.
D) 9 percent.

Question

Quizplus · Accepted Answer

The real rate of interest is calculated as nominal rate of interest - inflation rate. Therefore, the real rate of interest in this case is 8% - 9% = -1%, indicating a decrease in the purchasing power of the savings despite earning interest.

If a Person Earns an 8 Percent Nominal Rate of Interest