Tyrion has managed to save up $\$ 1,000$ which he has deposited in a Westeros Bank account that pays $4 \%$ interest.

Which of the following will be true if the actual inflation rate is lower than the expected inflation rate?

Choose 1 answer:
(A) We cannot tell without more information
(B) Tyrion and the bank would both benefit
(C) Neither benefit
(D) Both are worse off
(E) Tyrion would benefit; the bank would be worse off

Question

Tyrion has managed to save up $\$ 1,000$ which he has deposited in a Westeros Bank account that pays $4 \%$ interest.

Which of the following will be true if the actual inflation rate is lower than the expected inflation rate?

Choose 1 answer:
(A) We cannot tell without more information
(B) Tyrion and the bank would both benefit
(C) Neither benefit
(D) Both are worse off
(E) Tyrion would benefit; the bank would be worse off

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Calculate the real interest rate with the expected inflation rate: The real interest rate can be calculated using the formula $r = i - \pi_e$, where $r$ is the real interest rate, $i$ is the nominal interest rate, and $\pi_e$ is the expected inflation rate. ‖ ‖ step 2 ⋮ Calculate the real interest rate with the actual inflation rate: If the actual inflation rate is lower than the expected inflation rate, the real interest rate will be higher than initially calculated. This can be represented as $r_{actual} = i - \pi_{actual}$, where $\pi_{actual} < \pi_e$. ‖ ‖ step 3 ⋮ Analyze the impact on Tyrion and the bank: A higher real interest rate means that the purchasing power of the money Tyrion receives from the bank increases, benefiting Tyrion. Conversely, the bank receives money back that has a higher purchasing power than expected, which is a disadvantage for the bank. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Real Interest Rate and Inflation⚹ ∻Explanation∻ ⚹When the actual inflation rate is lower than the expected inflation rate, the real interest rate is higher, benefiting the depositor (Tyrion) and disadvantaging the bank.⚹◊What formula can be used to calculate the real interest rate if the actual inflation rate is lower than the expected inflation rate?⍭ Generate me a similar question◊

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