Question

You lent $290 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, eg, 52.75%.)

Answer 1

Answer:

Increase by 0.98%

Explanation:

In this question, we are applying the real rate of return formula which is shown below:

Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

= {( 1 + 3%) ÷ ( 1 + 2%)} - 1

= (1.03% ÷ 1.02%) - 1

= 1.0098 - 1

= 0.98%

The purchase price is increased by 0.98%

All other information which is given is not important. Hence, ignored it