Question

Your bank offers to pay you a 3% interest rate on a one-year fixed-deposit saving account. The inflation rate is expected to be 2% by the end of the year. Which of the following will be true if you decide to keep the money in the bank and the inflation rate turns out to be 4% by the end of the year?

I will be worse off
The bank will be worse off.
Both the bank and I will be worse off.
Neither the bank nor I will be worse off

Answer 1

Answer: By the end of the year I would be worst off

Explanation: This is because my savings would shrink ,although an interest is paid on the fixed account, the interest is not increasing at the rate at which the inflation is growing.

At any time savings don’t increase at the same rate as inflation, the owner of the fixed savings account will effectively lose money.

This is because with an increase in inflation comes a reduction in the buying power of an individual.