Suppose you put $100 dollars in the bank on January 1, 2013. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods on January 1, 2014.

Question

Quizplus · Accepted Answer

First, we need to calculate the real interest rate, which is the nominal interest rate minus the inflation rate:

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 5% - 2%
Real interest rate = 3%

Then, we can calculate the value of the $100 dollars in terms of real purchasing power on January 1, 2014:

Real value in 2014 = Real value in 2013 x (1 + Real interest rate)
Real value in 2014 = $100 x (1 + 3%)
Real value in 2014 = $100 x 1.03
Real value in 2014 = $103

Therefore, the answer is C: $103.

Suppose You Put $100 Dollars in the Bank on January