Title: QUIZ: Getting Real about Interest Rates
Course: Recommended Resources for AP Macro from FRE > Section: Unit 4: Financial Sector

Q: Why is keeping money in a savings account generally better than keeping it in a shoebox?
- You earn rewards points with a bank account (That is incorrect.)
- The money is hidden from inflation in a bank (That is incorrect.)
- You earn interest and it’s insured by the FDIC (That's correct!)
- Banks don’t charge any fees at all (That is incorrect.)
A: You earn interest and it’s insured by the FDIC

Q: What does a 3% interest rate on a savings account mean for a $1,000 deposit after one year, assuming no withdrawals?
- You will lose $30 (That is incorrect.)
- You will have $1,030 (That's correct!)
- You will have $970 (That is incorrect.)
- You will earn $60 (That is incorrect.)
A: You will have $1,030

Q: What is inflation?
- An increase in the price of one specific item (That is incorrect.)
- An increase in the average price level of goods and services (That's correct!)
- A temporary drop in unemployment (That is incorrect.)
- A decrease in the cost of living (That is incorrect.)
A: An increase in the average price level of goods and services

Q: What happens to the purchasing power of money when inflation increases?
- It stays the same (That is incorrect.)
- It increases (That is incorrect.)
- It decreases (That's correct!)
- It becomes more stable (That is incorrect.)
A: It decreases

Q: Which formula correctly calculates the real interest rate?
- Nominal interest rate + inflation rate (That is incorrect.)
- Nominal interest rate – inflation rate (That's correct!)
- Nominal interest rate × inflation rate (That is incorrect.)
- Inflation rate – nominal interest rate (That is incorrect.)
A: Nominal interest rate – inflation rate

Q: If the nominal interest rate is 5% and inflation is 3%, what is the real interest rate?
- 8% (That is incorrect.)
- 5% (That is incorrect.)
- 2% (That's correct!)
- -2% (That is incorrect.)
A: 2%

Q: If you keep your money in a shoebox and the inflation rate is 3%, what happens to your real interest rate?
- It becomes 3% (That is incorrect.)
- It stays at 0% (That is incorrect.)
- It becomes 6% (That is incorrect.)
- It becomes –3% (That's correct!)
A: It becomes –3%

Q: Who benefits from unexpected inflation when interest rates are fixed?
- Borrowers (That's correct!)
- Lenders (That is incorrect.)
- Banks (That is incorrect.)
- The Federal Reserve (That is incorrect.)
A: Borrowers

Q: How does unexpected inflation hurt lenders?
- It lowers the nominal interest rate (That is incorrect.)
- It reduces the real return they receive on loans (That's correct!)
- It increases their fees (That is incorrect.)
- It forces them to forgive debts (That is incorrect.)
A: It reduces the real return they receive on loans

Q: What is the Federal Reserve’s long-term inflation target?
- 0% (That is incorrect.)
- 1% (That is incorrect.)
- 2% (That's correct!)
- 5% (That is incorrect.)
A: 2%