Question

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of return if the rate of inflation was 3.4% over the year?

Answer 1

Answer:

The answer is -0.8704%= -0.9%

Explanation:

A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors.

Real rate of return=[ (1+nominal rate) / (1+ inflation rate) - 1]

Real rate of return = (1.025/1.034) -1= -0.0087* 100= -0.087%