Question

You deposit $962 in your savings account that pays an annual interest rate of 4.78%. The inflation rate is 1.72%. In nominal terms, how many extra dollars will you have next year?

Answer 1

Amount will be $990.66

Here you gained money. Otherwise for example, Let’s say you have $100 in a savings account that pays a 1% interest rate. After a year, you will have $101 in your account. But if the rate of inflation is running at 2%, you would need $102 to have the same buying power that you started with.

You've gained a dollar but lost buying power. Any time your savings don’t grow at the same rate as inflation, you will effectively lose money.

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