your emergency fund is in a savings account with a 1.5% interest rate. inflation rates are totaling 1% this…
your emergency fund is in a savings account with a 1.5% interest rate. inflation rates are totaling 1% this year. how does this affect your savings overall? choose 1 answer: a youre losing value. b youre gaining value. c theres no real effect.
Answer
Answer:
B. You're gaining value.
Explanation:
Step1: Calculate real - interest rate
The real - interest rate formula is $r = i - \pi$, where $i$ is the nominal interest rate and $\pi$ is the inflation rate. Here, $i = 1.5%=0.015$ and $\pi = 1% = 0.01$.
Step2: Substitute values
$r=0.015 - 0.01=0.005$ or $0.5%$. Since the real - interest rate $r>0$, the value of the savings is increasing in real terms, so you're gaining value.