Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent.A year later,Bob withdraws his $105.If inflation was 7 percent during the year the money was deposited,then Bob's purchasing power has increased by 2 percent.

Question

Quizplus · Accepted Answer

While Bob's account earned 5 percent interest, inflation was at 7 percent, meaning the purchasing power of his money decreased. When he withdrew the $105, he only gained back the interest earned and did not keep up with inflation, therefore his purchasing power has actually decreased, not increased.

Bob Deposits $100 in a Bank Account That Pays an Annual