interest and profit\nmichael has been saving his money and wants to invest it. after doing some research, he…

interest and profit\nmichael has been saving his money and wants to invest it. after doing some research, he has decided to invest $20,000 into a certificate of deposit. the interest rate on the cd is 3% with a term of five years, and the interest is paid out annually. based on recent inflation, michael is planning on an annual inflation rate of 2%.\nwhich statement best explains the interest rates related to this cd?\nthe nominal interest rate is 3 percent, while the real interest rate is 2 percent.\nthe nominal interest rate is 3 percent, while the real interest rate is 1 percent.\nthe nominal interest rate is 1 percent, while the real interest rate is 2 percent.\nthe nominal interest rate is 2 percent, while the real interest rate is 4 percent.

interest and profit\nmichael has been saving his money and wants to invest it. after doing some research, he has decided to invest $20,000 into a certificate of deposit. the interest rate on the cd is 3% with a term of five years, and the interest is paid out annually. based on recent inflation, michael is planning on an annual inflation rate of 2%.\nwhich statement best explains the interest rates related to this cd?\nthe nominal interest rate is 3 percent, while the real interest rate is 2 percent.\nthe nominal interest rate is 3 percent, while the real interest rate is 1 percent.\nthe nominal interest rate is 1 percent, while the real interest rate is 2 percent.\nthe nominal interest rate is 2 percent, while the real interest rate is 4 percent.

Answer

Explanation:

Step1: Recall the formula for real - interest rate

The formula for the real - interest rate $r$ is $r = i - \pi$, where $i$ is the nominal interest rate and $\pi$ is the inflation rate.

Step2: Identify given values

The nominal interest rate $i$ on the CD is $3%$ (or $0.03$ in decimal form) and the inflation rate $\pi$ is $2%$ (or $0.02$ in decimal form).

Step3: Calculate the real - interest rate

Substitute the values into the formula: $r=0.03 - 0.02=0.01$ or $1%$.

Answer:

The nominal interest rate is 3 percent, while the real interest rate is 1 percent.