Question

You lent $370 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of your money? How much did it increase or decrease? (Round answer to 2 decimal places, e.g. 52.75%).

a) Increase; $3.00
b) Decrease; $3.00
c) Increase; $7.40
d) Decrease; $7.40

Answer 1

You experienced an increase in the purchasing power of your money by $3.00.

Step-by-step explanation:

The question asks whether you experienced an increase or decrease in the purchasing power of your money when you lent $370 to a friend for one year at a nominal interest rate of 3 percent, while inflation was 2 percent. To determine this, we need to compare the nominal interest rate with the inflation rate.

In this case, the nominal interest rate is higher than the inflation rate, which means that the purchasing power of your money actually increased. To calculate the increase, we can use the formula:

Purchasing Power Increase = Nominal Interest Rate - Inflation Rate

Plugging in the values:

Purchasing Power Increase = 3% - 2% = 1%

So, the correct answer is a) Increase; $3.00.