You put money into an account. One year later you see that you have 6 percent more dollars and that your money will buy 2 percent more goods.
A) The nominal interest rate was 8 percent and the inflation rate was 6 percent.
B) The nominal interest rate was 6 percent and the inflation rate was 4 percent.
C) The nominal interest rate was 4 percent and the inflation rate was 2 percent.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the real interest rate is 6% - 2% = 4%. Therefore, the nominal interest rate must have been 6%, and the inflation rate must have been 4%. Option A and C both have too high or too low nominal and inflation rates, respectively. Therefore, option B is the best choice.

You Put Money into an Account