Question

If you deposit $25000 in a bank account at a 4% per year simple interest for 7 years, and if inflation rate is 5% per year would the purchase power of the original principal be protected?

Answer 1

the purchasing power of the original principal will not be protected because the interest rate is 4% and the inflation rate is 5% which means the net interest rate on the real interest rate is the difference between interest rate and inflation rate which is 4%-5% =-1% that is the reason why on the whole the purchasing power decreases by one percent every year and that is the reason why you can understand that there is decrease in the purchasing power of the currency.