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 2 percent,you will be able to buy __________ on January 1,2008.

Question

Quizplus · Accepted Answer

Nominal interest rate refers to the interest rate without adjusting for the inflation rate. In this case, the nominal interest rate is 5 percent. If we apply this rate to $100, we will have $105 by the end of 2007.

However, since the inflation rate is 2 percent, the value of goods will also increase by 2 percent. This means that to maintain the same purchasing power, we need to deduct 2 percent from the $105 we have at the end of the year.

$105 - 2% of $105 = $103. This means that on January 1, 2008, we can buy goods worth $103, which is option C.

Suppose You Put $100 Dollars in the Bank on January