Question

30) In 2016 the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same time the inflation rate was 1.5 percent. What was the real interest rate paid on savings? A)-2.05 percent B) -1.05 percent C) 0.55 percent D) 3.10 percent E) 2.05 percent

Isn't it -0.95 percent???

Answer 1

Real interest rate = Nominal interest rate - Inflation.

When the banks are paying an interest rate of 0.55% and the inflation rate is 1.5%. then the real interest rate = 0.55 - 1.5

= -0.95%. As the real interest rate is in negative the person is actually loosing some money due to inflation. But, this answer is not given in the options. Let's go with -1.05 then. That is the closest number we have. The answer is "B". (unless we don't assume that the nominal rate is wrongly printed and actually it should be 0.45%, we are not getting any answer here. )