In late 2001 the inflation rate was about 2.9%. If you invested in a savings account with an annual interest rate of 9.2%, what was the real growth rate of this investment?
A) 1.66%
B) 3.35%
C) 4.27%
D) 6.12%

Question

Quizplus · Accepted Answer

First, we need to calculate the real interest rate using the formula:
real interest rate = nominal interest rate - inflation rate
real interest rate = 9.2% - 2.9% 
real interest rate = 6.3%
Then, we can use the formula for real growth rate which includes the real interest rate:
real growth rate = (1 + nominal interest rate) / (1 + inflation rate) - 1
real growth rate = (1 + 9.2%) / (1 + 2.9%) - 1
real growth rate = 6.12%
Therefore, the real growth rate of this investment was 6.12%, which is option D.

In Late 2001 the Inflation Rate Was About 2