If the nominal one-year interest rate is 9.47% and expected inflation is 6.93% then what is the expected increase in purchasing power from saving for one year?

To determine the expected increase in purchasing power, we can use the **Fisher equation**, which relates nominal interest rates, real interest rates, and inflation:

\[
1 + r = \frac{1 + i}{1 + \pi}
\]

Where:
- \(r\) is the real interest rate (the expected increase in purchasing power),
- \(i\) is the nominal interest rate (9.47% or 0.0947),
- \(\pi\) is the expected inflation rate (6.93% or 0.0693).

We can solve for the real interest rate \(r\):

\[
r = \frac{1 + i}{1 + \pi} - 1
\]

Substituting the values:

\[
r = \frac{1 + 0.0947}{1 + 0.0693} - 1
\]

\[
r = \frac{1.0947}{1.0693} - 1
\]

\[
r \approx 0.0238 \text{ or } 2.38\%
\]

So, the expected increase in purchasing power from saving for one year is approximately **2.38%**.

Would you like more details or have any questions?

Here are 5 related questions:
1. How does the real interest rate affect long-term savings?
2. What happens if inflation exceeds the nominal interest rate?
3. How would deflation affect the Fisher equation?
4. What assumptions are made when using the Fisher equation?
5. How can changes in inflation expectations impact investment decisions?

**Tip:** A positive real interest rate indicates that your purchasing power increases, meaning your savings will grow in value relative to inflation.

If the nominal one-year interest rate is 9.47% and expected inflation is 6.93%, then what is the expected increase in purchasing power from saving for one year?

Discover how to calculate the expected increase in purchasing power using the Fisher equation. With a nominal interest rate of 9.47% and an inflation rate of 6.93%, find out how the real interest rate affects savings over one year. Ideal for college-level students in economics or finance.

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