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You deposit $2000 in a savings account and get $2200 a year later
You deposit $2000 in a savings account and get $2200 a year later. Meanwhile, the consumer price index rises from 200 to 208. The nominal interest rate and the real interest rate are:
10 percent; 4 percent4 percent; 6 percent6 percent; 4 percent10 percent; 6 percent
Expert Solution
First we calculate Nominal Interest Rate:
Amount = Principal*(1+Rate)^Time
$2,200 = $2,000*(1+Rate)^1
$2,200 = $2,000 + 2,000 Rate
$2,200 - $2,000 = 2,000 Rate
$200/2,000 = Rate
Rate = 10%
So, Nominal Interest Rate is 10%.
Now, We calculate Inflation Rate:
Inflation Rate = (208-200)/200 = 4%
Computation Of Real Interest Rate:
Real Interest Rate = Nominal Interest Rate - Inflation Rate
= 10% - 4%
Real Interest Rate = 6%
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