4 Multiple Choice Q6 You deposit 2000 in a savings account a

4. Multiple Choice Q6 You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204 In this case, the nominal interest rate ispercent, and the real interest rate ispercent. O 1, 5 0 3, 5 O 5, 1 O 5,3

Solution

The correct option is 5,3

P= $2,000

A = $2100

A = 2000(1+r)¹

2100 = 2000(1 + r)¹

1 + r = 21 / 20

(subtract 1 from both side 1 + r - 1 = 21 / 20 - 1)

r = 1 / 20

r = 0.05

r = 5%

Inflation rate = (CPI of second year - CPI of previous year / CPI of previous year) * 100

INFLATION RATE = [(204 - 200) / 200] * 100 = 2%

REAL INTEREST RATE = NOMIAL INTEREST - INFLATION RATE

= 5% - 2%

= 3%

The correct option is 5 , 3