Question

What is your real rate of return is your savings account pays 2.5% interest and inflation is at 1%

Answer 1

1.485 % ( approx )

Explanation:

We know that,

`\text{Real rate of return}=\frac{1+\text{Nominal rate}}{1+\text{Inflation rate}}-1`

Given,

Nominal rate = 2.5 % = 0.025

Inflation rate = 1 % = 0.01,

`\implies \text{Real rate of return}=(1+0.025)/(1+0.01)-1`

`=(1.025)/(1.01)-1`

`=1.01485149-1=0.01485149\approx 0.01485`

Thus, the real rate of return is 0.01485 or 1.485 %.

Answer 2

1.5

Explanation:

The real rate of return is calculated as the difference between rate of interest and the inflation.

so,Interest=2.5%

Inflation=1%

=2.5-1

=1.5%