Suppose you put 350 in a savings account that paid an annual

Suppose you put $350 in a savings account that paid an annual interest rate of 3%, and that you expect the annual ination rate to be 1%.What do you expect the real future value of this account to be in 4 years (i.e. what is the ex-ante real return?)

Solution

Real interest rate = Nominal interest rate - Inflation rate

= 3% - 1%

= 2%

So, the account will grow at 2% real per year.

Real future value after 4 years = $350 x (1.02)⁴ = $350 x 1.0824 = $378.85