Question19 Suppose you put $100 in the bank on January 1, 2019. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods, valued at 2019 prices, on January 1, 2020. $107 $105 $103 $99 $93 ResetMaximum marks: 1 Flag question undefinedSingle choice
A
$107
B
$105
C
$103
D
$99
E
$93

Question

Question19 Suppose you put $100 in the bank on January 1, 2019. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods, valued at 2019 prices, on January 1, 2020. $107 $105 $103 $99 $93 ResetMaximum marks: 1 Flag question undefinedSingle choice

A

$107

B

$105

C

$103

D

$99

E

$93

BlackTom AI · Accepted Answer

Start by identifying what the question asks: the amount of goods (valued at 2019 prices) you can buy with $100 placed in a bank for one year, given a 5% nominal interest rate and 2% inflation.
First, compute the nominal amount in one year: 100 × (1 + 0.05) = 105 dollars.
Next, adjust for inflation to convert that future nominal value into 2019-price terms. Real purchasing power is found by dividing by (1 + inflation): 105 ÷ (1 + 0.02) = 105 ÷ 1.02 ≈ 102.9412.
Rounding to the nearest dollar in 2019 prices yields about $103.
Now evaluate each option:
- $107: This would be the future nominal amount without adjusting for inflation, not its 2019-price value. It overstates what purchasing power translates to in 2019 prices.
- $105: This is the nominal amount you have after one year, but the question asks for value in 2019 prices, which requires removing the effect of inflation. So this is not the correct 2019-priced value.
- $103: This matches the calculation 105 ÷ 1.02 ≈ 102.94, rounded to $103, representing the amount of goods you can buy at 2019 prices after one year.
- $99: This underestimates the purchasing power; given the nominal interest exceeds inflation, the 2019-price value should be around 103, not 99.
- $93: This is even farther from the computed real value and ignores how inflation erodes only part of the nominal gain. It misrepresents the relationship between nominal return and inflation.
In summary, the correct choice is the one that reflects the real (inflation-adjusted) purchasing power after one year, which is approximately $103 in 2019 prices. The other options either ignore the inflation adjustment or misstate the relationship between nominal gains and real value.

Similar Questions

Suppose an economy is currently experiencing deflation measured at: 2.3%. If the nominal interest rate in this economy is 2%, which is the real interest rate?

Assume the following: The price level in 2020 = $100 People expect the price level in 2021 to be = $106 Actual price level in 2021 turns out to be $105 One-year nominal interest rate in 2020 = 5% Which of the following calculations is correct?

The regular saving rate at the Royal Bank of Canada (RBC) in 2025 is 0.55%. The official inflation rate in Canada in 2025 is 2.2%. What is the real interest rate of depositors of RBC?

If the rate of inflation is −2 percent, the output gap is −5 percent, the nominal interest rate is 5 percent, and the unemployment rate is 8 percent, what is the real interest rate?

If the real interest rate is negative, it must mean that ______.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler