Real Returns for Households
In an economy experiencing positive inflation, explain why the real rate of return on a typical household's savings deposit is generally more similar to the real return on holding physical cash than it is to the real return on an asset that pays the central bank's policy rate.
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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.