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 2009 you earned a real interest rate of
A) 0.59 percent.
B) 6.8 percent.
C) -1.4 percent.
D) 1.4 percent.

Question

Quizplus · Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. In this case, the nominal interest rate is 2 percent and the inflation rate is 3.4 percent, so the real interest rate is -1.4 percent. This means that even though you are earning interest on your savings, the purchasing power of your money is actually decreasing due to inflation.

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