Question

g You deposit $1,900 in your savings account that pays an annual interest rate of 3.25%. If the inflation rate is 1.09%, by how much will your purchasing power increase in percentage terms

Answer 1

Real purchasing power increase= 2.16%

Step-by-step explanation:

Giving the following information:

You deposit $1,900 in your savings account that pays an annual interest rate of 3.25%. The inflation rate is 1.09%.

In this example, we have two different and opposite effects. The interest rate increases your purchasing power. If the inflation rate is 0, the purchasing power will increase (in one year) 3.25%.

The inflation rate decreases the purchasing power of nominal income.

Real purchasing power increase= annual interest rate - inflation rate

Real purchasing power increase= 3.25 - 1.09= 2.16%