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 7 percent during the year the money was deposited,then Bob's purchasing power has increased by 12 percent.

Question

Quizplus · Accepted Answer

Deflation means that the general price level of goods and services decreases over time. This means that the purchasing power of money increases. In this case, the initial $100 that Bob deposited would have the same purchasing power as $93 due to the 7% deflation. After a year earning 5% interest, the account balance would be $105. If Bob withdrew this money and used it to buy goods and services, he would be able to purchase goods worth $105*.93 = $97.65, which is a 12% increase in purchasing power compared to the initial $100. Therefore, the statement is true.

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