Suppose you put $100 dollars in the bank on January 1,2007.If the annual nominal interest rate is 5 percent and the inflation rate is 5 percent,you will be able to buy __________ on January 1,2008.

Question

Quizplus · Accepted Answer

The nominal interest rate is 5%, so your $100 will grow to $105 by January 1, 2008. However, with an inflation rate of 5%, the purchasing power of money decreases, meaning $105 in 2008 will buy the same amount of goods as $100 in 2007. Thus, you can buy $100 worth of goods.

Suppose You Put $100 Dollars in the Bank on January