In January 2009, you can put your savings in a Bank of America account and be paid 2 percent per year. During 2009, suppose the inflation rate is 3.4 percent. In December, you will have earned a real interest rate of

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The real interest rate is the nominal interest rate minus the inflation rate, so in this case, the real interest rate would be -1.4 percent (2 percent - 3.4 percent = -1.4 percent). This means that the purchasing power of your savings would actually decrease over the course of the year.

In January 2009, You Can Put Your Savings in a Bank