Suppose that you deposit money in your bank account on January 1, 2023. The annual nominal interest rate is 6.0 percent and the inflation rate is 3.3 percent. Your one-year real rate of return is ________ percent.

Round your answer to the nearest tenth of a percent.

Question

Suppose that you deposit money in your bank account on January 1, 2023. The annual nominal interest rate is 6.0 percent and the inflation rate is 3.3 percent. Your one-year real rate of return is ________ percent.

Round your answer to the nearest tenth of a percent.

BlackTom AI · Accepted Answer

We start by identifying the key values: the nominal annual interest rate i = 6.0% and the inflation rate π = 3.3%. The one-year real rate of return r is given by the Fisher equation in its exact form: r = (1 + i) / (1 + π) − 1.

Substitute the numbers: r = 1.06 / 1.033 − 1.

Compute the division: 1.06 ÷ 1.033. Doing the calculation precisely (or with a calculator) gives approximately 1.0261.

Now subtract 1 to find the real rate: r ≈ 1.0261 − 1 = 0.0261, which as a percent is about 2.61%.

Rounding to the nearest tenth of a percent yields 2.6%.

If someone were to use a simple subtraction approximation (nominal minus inflation), they would get 6.0% − 3.3% = 2.7%, which is close but slightly different from the exact Fisher result. The exact method accounts for compounding effects between the nominal rate and inflation.

Summary: real rate ≈ 2.61%, which rounds to 2.6% to the nearest tenth of a percent.

FA25 ECON 302 002 Homework #6 (Inflation)

Suppose that you deposit money in your bank account on January 1, 2023. The annual nominal interest rate is 6.0 percent and the inflation rate is 3.3 percent. Your one-year real rate of return is ________ percent. Round your answer to the nearest tenth of a percent.

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