Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent. If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

Question

Quizplus · Accepted Answer

After one year, Susan will have earned $40 in interest (4% of $1000). However, due to inflation, her purchasing power will have fallen by 6%. Therefore, her actual gain in purchasing power is the difference between the interest earned and the inflation rate, which is (-6% + 4%) = -2%. This means that her purchasing power has fallen by 2%.

Susan Webster Deposits $1000 for a Year in a Bank