Question19 Suppose you put $100 in the bank on January 1, 2019. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods, valued at 2019 prices, on January 1, 2020. $107 $105 $103 $99 $93 ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

Start by identifying what the question asks: the amount of goods (valued at 2019 prices) you can buy with $100 placed in a bank for one year, given a 5% nominal interest rate and 2% inflation.
First, compute the nominal amount in one year: 100 × (1 + 0.05) = 105 dollars.
Next, adjust for inflation to convert that future nominal value into 2019-price terms. Real purchasing power is found by dividing by (1 + inflation): 105 ÷ (1 + 0.02) = 105 ÷ 1.02 ≈ 102.9412.
Rounding to the nearest dollar in 2019 prices yields about $103.
Now evaluate each option:
- $107: This would be the future nominal amount without adjusting for inflation, not its 2019-price value. It overstates what purchasing power translates to in 2019 prices.
- $105: This is the nominal amount you have after one year, but the question asks for value in 2019 prices, which requires removing the effect of inflation. So this is not the correct 2019-priced value.
- $103: This matches the calculation 105 ÷ 1.02 ≈ 102.94, rounded to $103, representing the amount of goods you can buy at 2019 prices after one year.
- $99: This underestimates the purchasing power; given the nominal interest exceeds inflation, the 2019-price value should be around 103, not 99.
- $93: This is even farther from the computed real value and ignores how inflation erodes only part of the nominal gain. It misrepresents the relationship between nominal return and inflation.
In summary, the correct choice is the one that reflects the real (inflation-adjusted) purchasing power after one year, which is approximately $103 in 2019 prices. The other options either ignore the inflation adjustment or misstate the relationship between nominal gains and real value.

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