To solve this question, the real rate of return formula is used, and we apply the data given in the exercise into the formula to find the real rate of return.
Formula for the real rate of return:
[tex]R = \frac{1 + N}{1 + i} - 1[/tex]
In which N is the nomial rate and i is the inflation rate, as decimals.
A certificate of deposit offers a nominal interest rate of 2.5 percent annually.
This means that [tex]N = 0.025[/tex]
Inflation is 1 percent
This means that [tex]i = 0.01[/tex]
What is the real rate of return:
Now we apply the formula:
[tex]R = \frac{1 + 0.025}{1 + 0.01} - 1[/tex]
[tex]R = 1.0149 - 1[/tex]
[tex]R = 0.0149[/tex]
0.0149*100% = 1.49%
Thus, the real rate of return is of 1.49%.
For another example of a similar problem, you can check https://brainly.com/question/20164190
