If inflation is 3% and savings earn 2%, what happens to the purchasing power of your money?

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Multiple Choice

If inflation is 3% and savings earn 2%, what happens to the purchasing power of your money?

Explanation:
Purchasing power is about how much you can buy with your money. Inflation at 3% means prices rise by 3% over the period. If your savings earn 2%, the money grows in nominal terms, but prices rise faster, so the real value of your money falls. Real return equals nominal return minus inflation, here 2% − 3% = −1%. So the purchasing power decreases and the real value of your savings declines. To keep up with prices, your return would need to be at least 3%; to grow purchasing power, it would need to exceed inflation.

Purchasing power is about how much you can buy with your money. Inflation at 3% means prices rise by 3% over the period. If your savings earn 2%, the money grows in nominal terms, but prices rise faster, so the real value of your money falls. Real return equals nominal return minus inflation, here 2% − 3% = −1%. So the purchasing power decreases and the real value of your savings declines. To keep up with prices, your return would need to be at least 3%; to grow purchasing power, it would need to exceed inflation.

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