Suppose, over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent.
A) The dollar value of savings increased at 2 percent, and the value of savings measured in goods increased at 3 percent.
B) The dollar value of savings increased at 1 percent, and the value of savings measured in goods increased at 2 percent.
C) The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 1 percent.
D) The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the sum of the real interest rate and the inflation rate, which is 3% + 1% = 4%. Therefore, the dollar value of savings increased at 4%, and the value of savings measured in goods increased at the real interest rate of 3%.

Suppose, Over the Past Year, the Real Interest Rate Was