You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)?
A) increased by 1 percent.
B) decreased by 1 percent.
C) increased by 5 percent.
D) decreased by 5 percent.

Question

Quizplus · Accepted Answer

The real interest rate can be approximated by subtracting the inflation rate from the nominal interest rate. In this case, 3% (nominal rate) - 2% (inflation) = 1%. This means the purchasing power of your money increased by 1%.

You Loaned $100 to a Friend for One Year at a Nominal