Suppose the nominal interest rate is 4 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 5 percent. At the end of the year, you have earned:
A) a real rate of return of 1 percent.
B) an increase in your purchasing power.
C) a nominal increase in your savings of $40.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

The nominal increase in your savings is $40, calculated as 4% of $1,000. However, due to 5% inflation, the real rate of return is negative, and your purchasing power decreases.

Suppose the Nominal Interest Rate Is 4 Percent Annually, and You