Question

Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was -2 percent. It follows that a. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 6 percent. b. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 4 percent. c. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 6 percent. d. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 8 percent.

Answer 1

Answer:

d

Explanation:

Nominal interest rate = real interest rate + inflation rate

6 - 2 = 4%

Inflation is a persistent rise in the general price levels

Types of inflation

1. demand pull inflation – this occurs when demand exceeds supply. When demand exceeds supply, prices rise

2. cost push inflation – this occurs when the cost of production increases. This leads to a reduction in supply. Higher prices are the resultant effect  

if inflation declined by 2 percent, it means purchasing power increased by 2%.

Total increase in purchasing power = 6 + 2 = 8