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.)

Since the real rate of interest is negative, this means that the purchasing power of the savings have decreased over the year.

Explanation:

Data provided:

Interest rates = 7.85 %

The rate of inflation = 12.3 %

Now,

The Real interest rate is calculated as:

Real interest rate = Nominal interest rate - Inflation rate

on substituting the respective values, we get

Real interest rate = 7.85% - 12.3%

Or

The real interest rate = - 4.45%

Here,

Since the real rate of interest is negative, this means that the purchasing power of the savings have decreased over the year.