Question

You've had your money in a high yield Money Market account, earning 6.5% for one year. The rate of inflation was 5%. What is your true or real rate of return?

Answer 1

Answer:

1.5%

Step-by-step explanation:

Answer 2

Based on the difference between the real rate of return and the nominal, we can infer that your real rate of return is 1.5%.

The real rate of return is the rate that takes into account, the influence of inflation. It is calculated as:

= Nominal rate - inflation

The nominal rate here is 6.5%.

The real rate is therefore:

= 6.5% - 5%

= 1.5%

In conclusion, the real rate is 1.5%.

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