Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is _____, it can be argued that _____ is/are worse off.
A) above 3%; the bank issuing the certificate
B) exactly 6%; both the bank and Tony
C) below 3%; Tony
D) below 3%; the bank issuing the certificate

Question

Quizplus · Accepted Answer

If the actual inflation rate is below 3%, the real interest rate (nominal interest rate minus inflation rate) is higher than expected, benefiting Tony and making the bank worse off.

Expecting the Inflation Rate to Be 3%, Tony Decides to Put