Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows thata. the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent. b. the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 2 percent. c. the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 2 percent. d. the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 10 percent.

a.the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent

Explanation:

The inflation rate is related to the purchasing power of the dollar. A 4% inflation rate means the price of goods increased by 4%. This is the same as saying that the dollar purchasing power decrease approximately by 4%.

The real interest rate is the nominal interest adjusted by inflation, to take into account the variation in the purchasing power of the dollar.

Is calculated as:

being r: real interest rate, i: nominal interest rate, g: inflation rate.

In the case that the real interest rate is 6% and the inflation rate is 4%, it means that the nominal interest rate has to be 10%.

In this case, the dollar value of savings are increased an amount equal to the nominal rate (10%).

To know the variation of the purchasing power ot this savings we substract the effect of the inflation (4%) from the nominal interest rate (10%), and we end with the real interest rate (6%).

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