Answer to Question #208146 in Microeconomics for shan

Question

Tom puts money into an account. One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods. What are nominal interest rate and inflation rate?

Answer 1

Solution:

The nominal interest rate is the rate charged by banks on savings and it is not adjusted for inflation.

This means that the nominal interest rate charged is 6 percent since her money increased by 6 percent.

Nominal interest rate = $6\%$

Inflation is the increase in the general level of prices, which affects the purchasing power of consumers. An increase in money supply will lead to inflation since the price level of goods will increase to higher levels. Therefore, inflation will be 4 percent.

Inflation rate = $4\%$