Arnold puts money into an account.One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods.
A)The nominal interest rate was 11 percent and the inflation rate was 5 percent.
B)The nominal interest rate was 6 percent and the inflation rate was 5 percent.
C)The nominal interest rate was 5 percent and the inflation rate was -1 percent.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The nominal interest rate is the percentage increase in money, which is 5 percent. The real interest rate is the percentage increase in purchasing power, which is 6 percent. The inflation rate can be found using the formula: real interest rate = nominal interest rate - inflation rate. Here, 6% = 5% - (-1%), indicating a deflation (negative inflation) of 1 percent.

Arnold Puts Money into an Account