Aditi deposits $1000 into a savings account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 2 percent. What happens at the end of the year?

Question

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At the end of the year, Aditi has earned $50 in interest on her savings account (5% of $1000). However, due to inflation, the purchasing power of her money has decreased by 2%, which means that she can buy 2% less with her money than she could at the beginning of the year. This means that her purchasing power has decreased by about $20 (2% of $1000). Therefore, Aditi has $50 more in her account, but her purchasing power has only increased by about $30 ($50 - $20).

Aditi Deposits $1000 into a Savings Account That Pays an Annual