Say, your savings account pays 1% interest and inflation is at 0.5% what is your real rate of return?

Question

Aleena Cantrell

Social Studies

2 November, 01:31

Say, your savings account pays 1% interest and inflation is at 0.5% what is your real rate of return?

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Answers (1)

Know the Answer?

Martin Reeves · Answer 1

Answer: Real Rate of return = 0.498% = 0.5%

Explanation:

Real rate of return = { (1 + nominal rate) / (1 + inflation rate) } - 1

In the questions

nominal interest rate = 1% (0.01)

Inflation rate = 0.5% (0.005)

Real Rate of return = { (1 + 0.01) / (1 + 0.005) } - 1

Real Rate of return = (1.01 / 1.005) - 1

Real Rate of return = 1.004975 - 1

Real Rate of return = 0.004975

Real Rate of return = 0.498% = 0.5%