Archie has a savings account at a bank. If he earns 6 percent interest on his account and if there is deflation, then his purchasing power rises by more than 6 percent over the course of a year.

Question

Quizplus · Accepted Answer

During deflation, the general level of prices is falling, meaning the real value of money increases. Therefore, if Archie earns a 6 percent nominal interest rate on his savings during a period of deflation, his purchasing power increases by more than the nominal interest rate because each unit of currency can buy more goods and services than before.

Archie Has a Savings Account at a Bank