Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Abhijit's purchasing power has increased by 12 percent.

Question

Quizplus · Accepted Answer

Abhijit's purchasing power increased because the deflation rate (7%) was higher than the nominal interest rate (5%), resulting in a real interest rate of approximately 12% (5% nominal + 7% deflation).

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