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Due to the low interest rates offered on standard savings and current accounts, the actual rate of return for a typical household's bank savings is more comparable to the real return on holding physical currency than to the higher real return available on assets that pay the policy rate.

Comparison of Typical Household Returns to Currency and Policy-Rate Returns

Analyze the financial situation for the individual's savings described in the case study. Compare the approximate real rate of return on the savings account to the real rate of return of holding the money as physical cash. Based on your analysis, explain why the return available to the individual is substantially different from the central bank's policy rate.

Analysis of Household Savings Options

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.

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.

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?

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