Suppose that the nominal interest rate is 7 percent and the expected inflation rate is 3 percent. What happens with the value of savings?

Question

Quizplus · Accepted Answer

The nominal interest rate (7 percent) already takes into account the expected inflation rate (3 percent), so the real interest rate (the rate of return adjusted for inflation) is 4 percent (7 percent - 3 percent). Therefore, the dollar value of savings increases by 7 percent, and the value of savings measured in goods is expected to increase by 4 percent (the expected inflation rate).

Suppose That the Nominal Interest Rate Is 7 Percent and the Expected