Question

University PRINTER VERSION BACK NEXT Question 11 Your answer is partially correct. Try again. You lent $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of your money? How much did it increase or decrease? (Round answer to 2 decimal places, e.g. 52.75%.) Increased by The purchasing power Open Show Work Click if you would like to Show Work for this question: SUBMIT ANSWER SAVE FOR LATER Question Attempts: 1 of 2 used

Answer 1

The nominal rate of return was 3%, while inflation was 2%, hence the real rate of return = 1% (3% - 2%). Therefore, my purchasing power in real terms has increased by 1%. An amount received later is lesser than the amount received today, the primary reason for the same is inflation, therefore, in order to arrive at the real rate of return, it is essential to deduct inflation from nominal rate of return.