You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. Over the next year, the actual inflation rate turns out to be 0.95%. What is your actual real rate of return?
A)0.95%
B)2.1%
C)1.15%
D)-0.3%

Question

Quizplus · Accepted Answer

Nominal rate of interest = 2.1%
Expected inflation rate = 1.25%
Real rate of interest = Nominal rate of interest - Expected inflation rate
Real rate of interest = 2.1% - 1.25%
Real rate of interest = 0.85%
Actual inflation rate = 0.95%
Actual real rate of return = Nominal rate of interest - Actual inflation rate
Actual real rate of return = 2.1% - 0.95%
Actual real rate of return = 1.15%
Therefore, the actual real rate of return is 1.15%.

You Purchase a Certificate of Deposit and Expect an Inflation