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24 July, 11:32

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.)

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  1. 24 July, 14:12
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    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.
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