During an inflation, a household with savings of $100,000
A) gains because inflation increases the value of their savings.
B) loses because the inflation increases the after-tax real interest rate.
C) gains because the inflation gives savers more money and so more purchasing power.
D) loses because inflation increases the real tax on the interest paid.
E) neither gains nor loses because inflation does not affect savers.

Question

Quizplus · Accepted Answer

Inflation increases the nominal interest rate, but it also increases the nominal income, including the interest income. However, the inflation also increases the tax on the nominal interest income, since it is based on the nominal rather than real interest rate. Therefore, the real after-tax interest rate decreases, and the real value of the savings decreases as well.

During an Inflation, a Household with Savings of $100,000