Suppose you put $100 in the bank on January 1, 2017. 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, 2018, valued at 2017's prices.
A) $95
B) $102
C) $97
D) $103
E) -$3

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate, which in this case is -3%. This means that the purchasing power of your money decreases by 3% over the year. The $100 you deposited will grow to $102 in nominal terms, but will only be able to purchase goods worth $97 at 2017 prices.

Suppose You Put $100 in the Bank on January 1