Suppose the annual nominal interest rate is 4 percent and the inflation rate is 5 percent. If you deposit $1,000, at the end of the year:
A) you will have earned a real rate of return of 1 percent.
B) your purchasing power will have increased.
C) your savings will have a nominal increase of $40.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate at which your money will grow without accounting for inflation. With a 4% nominal interest rate, a $1,000 deposit will earn $40 over the year, making statement C correct. Statements A and B are incorrect because the real rate of return, which accounts for inflation, is actually negative in this scenario (-1%), and thus, purchasing power decreases, not increases.

Suppose the Annual Nominal Interest Rate Is 4 Percent and the Inflation