question 3 of 10\na certificate of deposit offers a nominal interest rate of 2.5 percent annually. if…

question 3 of 10\na certificate of deposit offers a nominal interest rate of 2.5 percent annually. if inflation is 1.5 percent, what is the real rate of return?\na. 2.5 percent\nb. 1 percent\nc. 1.25 percent\nd. 1.75 percent

question 3 of 10\na certificate of deposit offers a nominal interest rate of 2.5 percent annually. if inflation is 1.5 percent, what is the real rate of return?\na. 2.5 percent\nb. 1 percent\nc. 1.25 percent\nd. 1.75 percent

Answer

Explanation:

Step1: Recall Fisher - equation approximation

The approximate Fisher - equation is $r = i-\pi$, where $r$ is the real - rate of return, $i$ is the nominal interest rate, and $\pi$ is the inflation rate.

Step2: Substitute given values

Given $i = 2.5%$ and $\pi=1.5%$. Substitute into the formula: $r=2.5 - 1.5$.

Step3: Calculate the real - rate

$r = 1%$.

Answer:

B. 1 percent