During an inflation, a household with savings of $100,000
A)gains because inflation increases the value of their savings.
B)loses because inflation increases the real tax on the interest paid.
C)loses because the inflation increases the after-tax real interest rate.
D)neither gains nor loses because inflation does not affect savers.
E)gains because the inflation gives savers more money and so more purchasing power.

Question

Quizplus · Accepted Answer

Inflation erodes the purchasing power of money, and if the nominal interest rate does not increase proportionally, the real interest rate (interest rate adjusted for inflation) decreases. Additionally, if taxes are levied on nominal interest, the real after-tax return on savings can be further reduced, leading to a loss for savers.

During an Inflation, a Household with Savings of $100,000