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Use the following information to answer the next 6 questions. Suppose you have $1000 side money. You have two options: spend this money today, or save it for the future. You are offered the following investment opportunity that if you lend the $1000 out today, you will receive $1200 dollars one year later. You think this is a good deal, accept it, and lend your money out. To keep a track of the price level, you check the Bureau of Labor Statistics webpage, and find that the CPI for today is 100. Your nominal interest rate from this investment is

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jepessoa

Answer:

20%

Explanation:

The nominal interest rate is the interest rate that you receive for a deposit or an investment without considering any type of adjustment due to inflation.

nominal interest rate = [(future value / present value) - 1] x 100 = [($1,200 / $1,000) - 1] x 100 = 0.2 x 100 = 20%

If you want to calculate the real interest rate, you must adjust your nominal interest rate by the period's inflation rate.

 

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