Suppose your bank pays you 5 percent interest per year on your savings account. If prices increase by 5 percent per year over that time, approximately how much do you gain by keeping $100 in the bank for a year?

Question

Quizplus · Accepted Answer

The interest earned is 5% of $100, which is $5. However, with a 5% inflation rate, the purchasing power of money decreases by 5%, effectively offsetting the interest earned. Thus, the real gain is approximately $0.

Suppose Your Bank Pays You 5 Percent Interest Per Year