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Question 8
A positive real interest rate indicates
(1) how fast the number of dollars in your savings account is rising over time.
(2) the purchasing power of your savings account today.
(3) how fast the purchasing power of your savings account is rising over time.
(4) the number of dollars in your savings account today.
(4)

Ask by Todd Dickson. in Cayman Islands
Mar 31,2025

Solución de inteligencia artificial de Upstudy

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A positive real interest rate means that the purchasing power of your savings is increasing over time.

Solución

Let the nominal interest rate be and the inflation rate be . The real interest rate, which reflects the change in purchasing power, is given by
A positive real interest rate ( ) means that after accounting for inflation, the purchasing power of your savings is increasing over time. In other words, you can buy more goods and services in the future than today.
Now, let’s review the options:
  1. This option refers to the growth in the number of dollars, not accounting for their purchasing power.
  2. This option only refers to the purchasing power at the present moment.
  3. This option describes the growth in the purchasing power over time, which is what a positive real interest rate indicates.
  4. This option again refers to the nominal amount of dollars, which does not account for inflation.
Thus, the correct choice is:
.

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Bonus Knowledge

When you have a positive real interest rate, it essentially means that the interest you earn on your savings account is growing faster than inflation. This is fantastic because it translates to an increase in the purchasing power of your money over time, allowing you to buy more with your savings in the future. Think of it as your money multi-tasking: growing and ensuring that your money’s value stays ahead of rising prices!
In real-world terms, positive real interest rates can encourage consumers to save more rather than spend, as they are incentivized to keep money in the bank for growth. If you’re planning for major expenses, such as buying a house or funding a vacation, a higher interest rate on your savings can mean more funds available down the line. It’s like a little financial cheerleader, motivating you to save up for those dreams!

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