Answer: "2 percent"
Explanation:
Just took the test, ANSWER is DEFINITELY "2 percent"
The real rate of return is 2%. Thus the correct option is (D).
The real rate of return refers to the return which is got after the deduction of the taxes and inflation.
For the calculation of real rate of return formula is used. So the formula for real rate of return is as follows:
Real rate of return = 1+N/1+i -1
In which N is the nominal rate and i is the inflation rate. A certificate of deposits provide the interest rate of 3.5% annually and inflation is 1.5%
Thus N is 0.035 and inflation (i) is 0.015.
So the real rate of return is:-
R = 1+N/1+i -1
R = 1+ 0.035/1+0.015 -1
R = 1.035/1.015 -1
R = 1.0197 -1
R = 0.0197
0.0197*100= 1.97~ 2%
Thus the real rate of return is 2%. The correct option is (D).
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