Arnold puts money into an account. One year later he sees that he has 7 percent more dollars and that his money will buy 3 percent more goods. Which of the following is consistent with these facts?

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate of interest before adjusting for inflation. The inflation rate is the rate at which prices for goods and services are rising. In this case, Arnold's money will buy 3 percent more goods, so the inflation rate is 3 percent. The nominal interest rate is 7 percent, which is 4 percent higher than the inflation rate. So the correct answer is A.

Arnold Puts Money into an Account