Question

magine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?

Answer 1

Answer:

less than today

Explanation:

Inflation is the general increase in consumer prices in the economy. When prices are increasing, the purchasing power of a currency decreases. A 3 percent inflation rate indicates that prices of goods and services have increased by an average of 3 percent.

Interest rate expresses the rate at which money saved is growing per year. A 5 percent interest rate means that the amount in the account will increase by 5 percent.

For there to be a real increase in the money saved, the interest rate must be higher than the inflation rate. A high-interest rate compensates for the increase in prices.