Suppose that the nominal interest rate is 5 percent and the expected inflation rate is 3 percent.What happens with the value of savings?

Question

Quizplus · Accepted Answer

The nominal interest rate is the rate at which money grows in dollar terms, which is 5 percent in this case. However, inflation erodes the purchasing power of money, meaning the value of savings measured in goods will increase by the difference between the nominal interest rate and the inflation rate. Therefore, the value of savings measured in goods will increase by 2 percent (5 percent - 3 percent). So the dollar value of savings increases by 5 percent, and the value of savings measured in goods is expected to increase by 2 percent, making option C the correct answer.

Suppose That the Nominal Interest Rate Is 5 Percent and the Expected