Consider an economy with an annual inflation rate of 3%, a central bank policy rate of 5%, and a typical household savings account interest rate of 0.5%. Based on this information, which statement most accurately compares the real rates of return from a household's perspective?
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Analysis of Household Savings Options
Consider an economy with an annual inflation rate of 3%, a central bank policy rate of 5%, and a typical household savings account interest rate of 0.5%. Based on this information, which statement most accurately compares the real rates of return from a household's perspective?
Real Returns for Households
A household's savings held in a typical commercial bank deposit account will always yield a higher real rate of return than holding the same amount in physical currency, because the bank deposit earns a nominal interest rate while physical currency does not.