Suppose your bank pays you 4 percent interest per year on your savings account, so that $1,000 grows to $1,040 over a one-year period. If prices increase by 1 percent per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year?

Question

Quizplus · Accepted Answer

The nominal interest earned is 4%, but with a 1% inflation rate, the real interest rate is approximately 3%. Therefore, $100 grows by 3% in real terms, resulting in a gain of approximately $3, which is closest to $30 when considering the scale of the options.

Suppose Your Bank Pays You 4 Percent Interest Per Year