Charles wants to make an investment that will have a real growth rate of 8%. If the current inflation rate is 1.3%, what annual interest rate will he need to get on his investment to accomplish his goal?
A) 8.65%
B) 9.40%
C) 14.67%
D) 15.82%

Question

Quizplus · Accepted Answer

To calculate the required interest rate, we need to use the Fisher equation, which states that the real interest rate equals the nominal interest rate minus the inflation rate. Mathematically, we can write it as follows:
Real interest rate = Nominal interest rate - Inflation rate
Given that the real growth rate is 8% and the inflation rate is 1.3%, we can calculate the required nominal interest rate as follows:
Nominal interest rate = Real interest rate + Inflation rate
Nominal interest rate = 8% + 1.3% = 9.3%
Therefore, Charles will need to get an annual interest rate of 9.3% to achieve a real growth rate of 8%. Among the answer choices, the closest one is B (9.4%), which is the best choice.

Charles Wants to Make an Investment That Will Have a Real