Suppose the nominal interest rate was 5 percent and the inflation rate was 3.5 percent.
A) The dollar value of savings increased at 1.5 percent, and the value of savings measured in goods increased at 3.5 percent.
B) The dollar value of savings increased at 3.5 percent, and the value of savings measured in goods increased at 1.5 percent.
C) The dollar value of savings increased at 3.5 percent, and the value of savings measured in goods increased at 5 percent.
D) The dollar value of savings increased at 5 percent, and the value of savings measured in goods increased at 1.5 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is 5%, which means the dollar value of savings increases by 5%. The real interest rate, which measures the increase in value of savings in terms of goods, is the nominal rate minus the inflation rate (5% - 3.5% = 1.5%).

Suppose the Nominal Interest Rate Was 5 Percent and the Inflation