Shawn puts money into an account.One year later he sees that he has 6 percent more dollars and that his money will buy 5 percent more goods.
A)The nominal interest rate was 11 percent and the inflation rate was 5 percent.
B)The nominal interest rate was 6 percent and the inflation rate was 5 percent.
C)The nominal interest rate was 5 percent and the inflation rate was -1 percent.
D)The nominal interest rate was 6 percent and the inflation rate was 1 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate of interest before adjusting for inflation. The inflation rate is the rate at which prices for goods and services increase over time. In this case, the nominal interest rate is 6 percent and the inflation rate is 1 percent. This means that the real interest rate, which is the nominal interest rate minus the inflation rate, is 5 percent. This is the same as the increase in the purchasing power of the money, which is 5 percent.

Shawn Puts Money into an Account