Suppose the annual nominal interest rate is 7 percent and the inflation rate is 7 percent. If you deposit $1,000, at the end of the year:
A) your purchasing power will have increased.
B) your purchasing power will have stayed the same.
C) your savings will have a nominal decrease.
D) your purchasing power will have decreased.

Question

Quizplus · Accepted Answer

When the nominal interest rate equals the inflation rate, the real interest rate (which adjusts for inflation and reflects the change in purchasing power) is effectively zero. This means that while the nominal amount of money increases due to interest, its purchasing power remains the same because the inflation rate has eroded the value of money at the same rate as the interest has increased it.

Suppose the Annual Nominal Interest Rate Is 7 Percent and the Inflation