Which of the following is not correct? a. If the inflation rate exceeds the nomi

Question

Which of the following is not correct?
a. If the inflation rate exceeds the nominal interest rate, then the purchasing power of an
interest-earning deposit falls over time.
b. If there is deflation, then the purchasing power of an interest-earning deposit rises by
more than the nominal interest rate over time.
c. The higher the rate of inflation, the smaller the increase in the purchasing power of an
interest-earning deposit.
d. The purchasing power of an interest-earning deposit can increase or decrease over
time, but it cannot stay the same.

Explanation / Answer

d. The purchasing power of an interest-earning deposit can increase or decrease over time, but it cannot stay the same. (If the nominal interest rate is 5% and inflation rate is 5%, the real interest rate is 0% so, in this case, the deposit can and will stay the same).

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