Answered: A bank offers me 10% annual interest on…

A bank offers me 10% annual interest on an investment, but the inflation rate is 5%. What is the real interest rate? а. 4.76% b. 2% С. 5% d. 15%

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 3SCQ: Compute the inflation rate for fruit prices from 2001 to 2004.

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Concept explainers

Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.

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A bank offers me 10% annual interest on an investment, but
the inflation rate is 5%. What is the real interest rate?
а.
4.76%
b.
2%
C.
5%
d.
15%

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