If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?

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Question restatement: If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?

Option A: -9.5% — This would imply a real rate far below the inflation rate and negative by more than the nominal minus inflation; it misapplies the relationship and would require a nominal rate well below inflation, which is not the case here.

Option B: 9.5% — This treats the real rate as larger than the nominal rate and ignores inflation, effectively adding inflation to the nominal rate. Since real rate is roughly nominal minus inflation, this option overstates the outcome and is inconsistent with the standard Fisher-like relation.

Option C: 3.5% — This is the correct calculation under the simple approximation real rate ≈ nominal rate − inflation rate. Substituting the given values (6.5% − 3.0% = 3.5%), we obtain a positive real return after accounting for inflation.

Option D: -3.5% — This would reflect a scenario where inflation exceeds the nominal rate by 3.5 percentage points in a way that reverses the sign, which contradicts the provided numbers (nominal 6.5% is greater than inflation 3.0%).

Option E: 1.5% — This result would arise if inflation were 5.0% (since 6.5% − 5.0% = 1.5%), but the given inflation rate is 3.0%, so this value does not match the data.

Overall reasoning: In basic interest theory, the real rate of interest is approximately the nominal rate minus the inflation rate. Applying the given figures yields 6.5% − 3.0% = 3.5%. Each incorrect option misrepresents either the sign or the arithmetic of this relationship, or combines the numbers as if inflation were higher or the nominal rate were reduced in an incompatible way.

Spr25_ECON001A_39193 F. Quiz #4: Chapter 9

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?

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Spr25_ECON001A_39193 F. Quiz #4: Chapter 9

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?

View Explanation

Log in for full answers

Similar Questions

If the nominal interest rate is equal to 5%, and the inflation rate is equal to -5%, then what is the real interest rate?

Part 1Suppose you postpone consumption and invest at​ 6% when inflation is​ 2%. What is the approximate real rate of your reward for​ saving? Part 1 A. ​4% B. ​3% C. ​5% D. ​6%

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 10 percent and the inflation rate is 5 percent, the real interest rate is ______ percent.

A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?

You deposited your holiday bonus in your bank account on January 1, 2024. If the annual nominal interest rate is 4.3 percent and the inflation rate is 2.0 percent, you will earn ______ percent in real terms. Round your answer to the nearest tenth of a percent.

Finally, inflation rises to 6.5 percent and your bank adjusts the interest rate to 12.5 percent to maintain the same pre-tax interest rate (according to the Fisher equation). Calculate your real after-tax rate of return (in percent). Round your answer to the nearest tenth of a percent.

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