Economics
Interest below inflation
Your savings account pays 4% a year while prices rise by 10%. Are you better or worse off after a year, and by roughly how much?
- Hint 1What can £100 buy now, and what can the account balance buy in a year?
- Hint 2Divide 1.04 by 1.10.
- £100 grows to £104.
- Things that cost £100 now cost £110.
- Your money buys 104 ÷ 110 ≈ 0.945 of what it bought before.
- So you are about 5.5% worse off in what your money buys: a real return of about −5.5%.
- The shortcut 4% − 10% = −6% is close but slightly overstates the loss.
Where it lands: Worse off by about 5.5% in what your money can buy.
The trap: Saying you are better off because the balance went up.
What a tutor might ask next: Who gains when inflation runs above interest rates?
Now do one out loud. In the interview you think aloud with a tutor. Try an Economics problem with hints, follow-ups and Mia's feedback on how you think.