Cole puts money into an account. One year later, he sees that he has 4 percent more dollars and that his money will buy 3 percent more goods. Which of the following is consistent with these facts?

Question

Quizplus · Accepted Answer

If Cole’s money increased by 4 percent over the year and the goods he buys cost 3 percent more at the end of the year, he has experienced a net gain of 1 percent in his purchasing power. That means that the inflation rate was 1 percent. To get the nominal interest rate, we add the inflation rate to the real interest rate, so Cole must have earned a 4 percent nominal interest rate and a 3 percent real interest rate, implying a 1 percent inflation rate. Therefore, answer choice A is the correct answer.

Cole Puts Money into an Account