Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent.A year later,Bob withdraws his $105.If deflation was 5 percent during the year the money was deposited,then Bob's purchasing power has not changed.

Question

Quizplus · Accepted Answer

Although Bob's bank account balance increased to $105 due to the 5 percent interest rate, the 5 percent deflation means that the purchasing power of his money decreased. Therefore, he would need more money than $105 to purchase the same goods and services he could have bought with $100 a year ago.

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