Banking and Personal Finance Review for Students Practice Test

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How do you calculate real return when nominal return is 8% and inflation is 3%?

Approximately 5.50%.

Approximately 4.85%.

Real return tells you how much your purchasing power grows after inflation. To get it accurately, use the formula: real = (1 + nominal) / (1 + inflation) − 1. Plugging in 8% for nominal and 3% for inflation gives (1.08 / 1.03) − 1 ≈ 0.0495, or about 4.95%.

The simple subtraction method (nominal minus inflation) would suggest about 5%, but the exact calculation is slightly lower due to compounding. Among the options, the value closest to 4.95% is approximately 4.85%, so that choice is the best match.

Approximately 3.00%.

Approximately 6.00%.