Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods on January 1, 2018, valued at 2017's prices.
A) $93
B) $107
C) $103
D) $105
E) $99

Question

Quizplus · Accepted Answer

The real interest rate can be calculated as follows: 
Real interest rate = Nominal interest rate - Inflation rate 
Real interest rate = 5% - 2% = 3% 
This means that the value of your $100 in real terms will increase by 3%. Therefore, on January 1, 2018, you will be able to buy $103 worth of goods at 2017's prices.

Suppose You Put $100 in the Bank on January 1