Question

Suppose your bank pays you 4 percent interest per year on your savings​ account, so that​ $1,000 grows to​ $1,040 over a oneminusyear period. If prices increase by 1 percent per year over that​ time, approximately how much real value do you gain by keeping​ $1000 in the bank for a​ year?

Answer 1

Answer:

3 percent which is $30

Explanation:

The real value of money is measured against a basket of goods or services, or against a particular product or service.  The real value is adjusted for inflation. In other words, the real value of money is its nominal value adjusted for inflation.

If the bank pays an interest rate of 4  percent, which leads to an increase of savings from $1000 to  $1040, should prices increase by 1 percent, then the real value of money has increased by 3 percent. One percent increase in prices represents inflation.  Keeping $1000 in the bank will earn a 3 percent real value or $30.