Question

Oscar has received a $4,000 gift and is looking for a bank to start a savings account. Which option

would be the best for him at a current inflation rate of 1.5%?
A nominal interest rate of 5%
A real interest rate of 5%
A real interest rate of 3%
A nominal interest rate of 3%

Answer 1

The best option for him would be a real interest rate of 5%.

Explanation:

The nominal interest rate is the one that represents the percentage of increase of the money that is in a certain investment, without discounting the depreciation due to inflation or the payment of taxes.

On the other hand, the real interest rate is the one that represents the real increase in the money invested, after discounting inflation and any taxes to be paid.

Therefore, the best option for Oscar would be to invest his $ 4,000 in a savings account with a real interest rate of 5% per year.