How much interest will Michael earn on this CD in the first year, based on the real interest rate? $200 $600 $1,000 $1,400

Answer: Micheal will earn an interest of $600 in the first year based on nominal interest rates

Since we need to compute the interest paid out at the end of year 1, we use the following formula in order to find the interest

where

SI = Simple interest

P = Principal or initial amount invested

N = Number of years

R = Nominal interest rate

Nominal interest rate refers to the rate quoted on the CD or the rate agreed upon. In this question, the nominal interest rate is 3%.

Substituting the values in the formula above we get,

its $200