Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 2 percent.

Question

Quizplus · Accepted Answer

Although Abjihit has more money nominally ($105), the 7 percent inflation rate means that the purchasing power of his money has actually decreased, not increased, because prices of goods and services have risen faster (7%) than his money has grown (5%).

Abjihit Deposits $100 in a Bank Account That Pays an Annual