Question

Juanita worked hard all year so that she could go to nursing school the following year. She put her savings into a mutual fund that paid a nominal interest rate of 4 percent a year. The CPI was 252 at the beginning of the year and 257 at the end of the year. What was the real interest rate that Juanita earned?

Answer 1

Answer:

1.98%

Explanation:

Inflation rate = (CPI at the end of the year / CPI at the beginning of the year) - 1

(257 / 252) - 1 = 0.01984 = 1.984%

(1 + nominal interest rate) = (1 + inflation rate) (1 + real interest rate)

1.04 = 1.01984 x  (1 + real interest rate)

(1 + real interest rate)  = (1.04 / 1.01984) - 1 = 1.98%