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Suppose that, in March 2018, you had deposited $1000 in a savings account (and left it...

Suppose that, in March 2018, you had deposited $1000 in a savings account (and left it there until March of this year) and the bank paid an interest rate of 2% on that savings. What nominal interest rate did you earn? What real interest rate did you earn? Was it a good decision on your part, why or why not?

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Answer #1

Nominal interest rate = Stated interest rate = 2%

US inflation rate from March 2018 to Feb 2019 (data source: Trading Economics website) and average monthly inflation rate is as follows.

Month Inflation Rate (%)
Mar-18 2.4
Apr-18 2.5
May-18 2.8
Jun-18 2.9
Jul-18 2.9
Aug-18 2.7
Sep-18 2.3
Oct-18 2.5
Nov-18 2.2
Dec-18 1.9
Jan-19 1.6
Feb-19 1.5
AVERAGE (%) = 2.35

Real interest rate = Nominal interest rate - Average monthly inflation rate = 2% - 2.35% = -0.35%

Since real interest rate is negative, I took a wrong decision by investing at 2%.

However, if only inflation rate of Feb 2019 is considered, then

Real interest rate = Nominal interest rate - Monthly inflation rate of last month = 2% - 1.5% = 0.5%

Since real interest rate is positive, I took a correct decision by investing at 2%.

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