Suppose the annual nominal interest rate is 10percent and the inflation rate is 6 percent. If you deposit $1,000, at the end of the year:
A) you will have earned a real rate of return of 4 percent.
B) your purchasing power will have increased.
C) your savings will have nominal increased by $100.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

The nominal interest rate is 10%, so a $1,000 deposit will earn $100 in interest, making statement C true. The real rate of return adjusts for inflation, calculated as approximately the nominal rate minus the inflation rate (10% - 6% = 4%), making statement A true. Since the real rate of return is positive, your purchasing power increases, making statement B true. Therefore, all statements are true.

Suppose the Annual Nominal Interest Rate Is 10percent and the Inflation