Suppose the nominal interest rate is 7 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 7 percent. At the end of the year, you have earned:
A) an increase in your purchasing power.
B) no increase in your purchasing power.
C) no increase in your savings.
D) a decrease in your purchasing power.

Question

Quizplus · Accepted Answer

Although the nominal interest rate and the deposit amount suggest a gain in savings, the inflation rate offsets this by reducing the purchasing power of the earned interest and deposit. Therefore, there is no increase in purchasing power at the end of the year.

Suppose the Nominal Interest Rate Is 7 Percent Annually, and You