In 1975, interest rates were 7.85 % and the rate of inflation was 12.3 % in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over the year? (Note: Be careful not to round any intermediate steps less than six decimal places.) What was the real interest rate in 1975? Real rate of interest in 1975 was nothing%. (Round to two decimal places.)

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aquialaska aquialaska · Answer 1 · 2020-04-11T05:24:56+02:00

Answer:

The correct answer is -3.963%.

Explanation:

According to the scenario, the given data are as follows:

Interest rate = 7.85%

Rate of inflation = 12.3%

So, we can calculate the real interest rate by using the following method:

Real interest rate =[ (1 + Interest rate) ÷ ( 1 + inflation rate) ] - 1

By putting the value, we get,

Real interest rate =[ (1 + 0.0785) ÷ ( 1 + 0.123) ] - 1

= -3.963%

So, the purchasing power of your savings decreased by 3.963%.