If an individual has $10,000 in a savings account paying 3% and the inflation rate is 2%, the nominal interest rate is:

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate at which money grows in dollar terms before accounting for inflation. Therefore, the nominal interest rate is 3%.

The real interest rate is the rate at which purchasing power increases. Therefore, the real interest rate is the difference between the nominal interest rate and the inflation rate. In this case, the real interest rate is 3% - 2% = 1%.

Therefore, the answer is D, 3% nominal interest rate and 1% real interest rate.

If an Individual Has $10,000 in a Savings Account Paying