You put money into an account. One year later you see that you have 5 percent more dollars and that your money will buy 6 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) None of the above is correct.

Question

Quizplus · Accepted Answer

The nominal interest rate is the percentage increase in money, which is 5 percent. The real interest rate is the percentage increase in purchasing power, which is 6 percent. The real interest rate is calculated as the nominal interest rate minus the inflation rate. Therefore, the inflation rate must be -1 percent (5% - (-1%) = 6%).

You Put Money into an Account