Your investments increased in value by 11.1 percent last year but your purchasin

Question

Your investments increased in value by 11.1 percent last year but your purchasing power increased by only 8.4 percent. What was the approximate inflation rate? (Enter your answer as a percent rounded to 1 decimal place. Omit the "%" sign in your response.)

Your investments increased in value by 11.1 percent last year but your purchasing power increased by only 8.4 percent. What was the approximate inflation rate? (Enter your answer as a percent rounded to 1 decimal place. Omit the "%" sign in your response.)

Explanation / Answer

This example highlights the difference between nominal interest rates and real interest rates. The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power. In other words, the real rate of interest is the nominal rate reduced by the rate of inflation. In our example, the nominal rate is 11.1% and the real rate is 8.4%

So Inflation rate =11.1%-8.4%=2.7%

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