Question

What is the rate of inflation if a savings account has a nominal interest rate 3% and a real interest rate of 1%.

Answer 1

The correct answer is that the rate of inflation is 2%.

Explanation:

Real = nominal - inflation

Inflation = Nominal - Real

Inflation = 3% - 1% = 2%

In general, the nominal quantities are those in «gross». Precisely, what the real magnitudes do is subtract the effect of inflation from the nominal magnitude. When speaking in real terms, it refers to base year prices. That is, a specific year is set as a reference and the prices of the base year of the products to be studied are taken. In this way, the effect of inflation is excluded in the studies. The process to convert a nominal value to real terms is precisely called inflation adjustment. And thanks to this adjustment, real values are an excellent measure of net purchasing power, regardless of price changes over time.