Understanding Inflation and Real Interest Rate

The video explores two scenarios to understand the impact of raises and inflation on purchasing power. In scenario one, both the raise and inflation are 3%, resulting in no real gain. In scenario two, a 2% raise and 1% inflation lead to a net gain in purchasing power. The concept of real interest rate is introduced, calculated as the nominal interest rate minus inflation, to measure true growth in purchasing power.

In Scenario 1, what is the percentage increase in both income and expenses?

• 5%

• 3%

• 4%

• 2%

What is the impact of inflation on purchasing power in Scenario 1?

• Doubles purchasing power

• No change in purchasing power

• Decreases purchasing power

• Increases purchasing power

In Scenario 2, what is the net gain in purchasing power?

• $30

• $20

• $10

• $0

In Scenario 2, what is the percentage increase in expenses?

• 3%

• 0%

• 1%

• 2%

What is the real interest rate in Scenario 1?

• 3%

• 0%

• 2%

• 1%

How is the real interest rate calculated?

• Nominal interest rate times inflation rate

• Inflation rate minus nominal interest rate

• Nominal interest rate minus inflation rate

• Nominal interest rate plus inflation rate

What is the nominal interest rate in Scenario 2?

• 1%

• 2%

• 3%

• 4%

Which scenario results in a higher real interest rate?

• Both scenarios have the same real interest rate

• Scenario 2

• Neither scenario has a real interest rate

• Scenario 1

What is the main factor that affects real interest rate?

• Nominal interest rate

• Inflation rate

• Both nominal interest rate and inflation rate

• Neither nominal interest rate nor inflation rate

Why is understanding real interest rate important for personal finances?

• It predicts future inflation

• It determines the actual growth in purchasing power

• It helps in calculating taxes

• It sets the nominal interest rate