What is the real interest rate if Pablo’s nominal rate is 5.5 percent and the inflation rate is 0.5 percent?

What is the real interest rate if Pablo’s nominal rate is 5.5 percent and the inflation rate is 0.5 percent?

• A. 4.0 percent
• B. 5.0 percent
• C. 5.5 percent
• D. 6.0 percent

Answer: (B)

To determine the real interest rate, the formula used is: Real Interest Rate = Nominal Interest Rate - Inflation Rate In this case, Pablo’s nominal interest rate is 5.5 percent, and the inflation rate is 0.5 percent. Plugging in these values, we get: Real Interest Rate = 5.5% - 0.5% = 5.0% This calculation shows that the correct real interest rate reflects the nominal rate adjusted for the impact of inflation, thereby providing a clearer picture of the purchasing power of the interest earnings. Therefore, the answer indicating 5.0 percent represents the amount by which the nominal rate exceeds the inflation rate, showing the real increase in value.

To determine the real interest rate, the formula used is:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

In this case, Pablo’s nominal interest rate is 5.5 percent, and the inflation rate is 0.5 percent. Plugging in these values, we get:

Real Interest Rate = 5.5% - 0.5% = 5.0%

This calculation shows that the correct real interest rate reflects the nominal rate adjusted for the impact of inflation, thereby providing a clearer picture of the purchasing power of the interest earnings. Therefore, the answer indicating 5.0 percent represents the amount by which the nominal rate exceeds the inflation rate, showing the real increase in value.