If you put $100 in the bank for one year at an annual nominal interest rate of 5 percent and yearly inflation is running at 7 percent, you will be able to buy $105 worth of goods when you pull it out of your account.

Question

Quizplus · Accepted Answer

The nominal interest rate of 5 percent does not account for inflation, and therefore the real interest rate (adjusted for inflation) is -2 percent. This means that while the $100 will earn interest, it will actually have less purchasing power when withdrawn due to the higher inflation rate. Inflation reduces the value of money over time, meaning that the $105 will not be able to buy the same amount of goods as it would have a year ago.

If You Put $100 in the Bank for One Year