Question

An overseas bank announces that it is introducing a new type of savings account that pays a 3% fixed rate of interest for deposits of a one year duration. this 3% is:

o a real rate of interest.
o a post-tax rate of interest.
o a nominal rate of interest.
o a long-term rate of interest.

Answer 1

The 3% interest rate on the new savings account is considered a nominal rate of interest, as it doesn't account for inflation or taxes.

Step-by-step explanation:

The new savings account with a 3% interest rate being introduced by an overseas bank represents a nominal rate of interest. This is because a nominal interest rate refers to the rate of interest before adjustments for inflation or other factors, such as taxes, are taken into account. The real rate of interest is adjusted for inflation, the post-tax rate of interest indicates the rate after taxes are considered, and a long-term rate of interest typically refers to rates offered for longer durations, often beyond one year.

By comparing the scenario to CDs, which demand a slightly higher interest rate because they lock funds away and decrease liquidity, the concept becomes clearer. Since savings accounts pay slightly less interest but offer more liquidity, the stated 3% is not impacted by these factors and remains a nominal figure. Remember, the nominal rate does not give us information about the actual buying power of the interest earned after considering inflation or taxation.