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

Question

Quizplus · Accepted Answer

First, we need to adjust the nominal interest rate for inflation using the Fisher equation:

real interest rate = nominal interest rate - inflation rate 
real interest rate = 2% - 5% 
real interest rate = -3%

This means that the purchasing power of your money will actually decrease over time, despite earning interest.

Now, we can calculate the value of your $100 after one year:

value in nominal terms = $100 + ($100 x 2%) = $102

value in real terms = $102 / (1 + 5%) = $97

So, your $100 can only buy $97 worth of goods after one year, taking into account inflation. Therefore, the best choice is C) $97.

Suppose You Put $100 Dollars in the Bank on January