Suppose your bank pays you 5% interest per year on your savings account. If prices increase by 3% per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year?

Question

Quizplus · Accepted Answer

To calculate the real value gained, we need to subtract the inflation rate from the interest rate, and then apply it to the initial investment.

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 5% - 3%
Real interest rate = 2%

So, the real value gained on $100 is:

Real value gained = Initial investment x Real interest rate
Real value gained = $100 x 2%
Real value gained = $2

Therefore, the answer is C, $2.

Suppose Your Bank Pays You 5% Interest Per Year on Your