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Veronica has received a $3,000 gift and is looking for a bank to start a savings account. Which option would be the best for her if the current inflation rate is 2.5%?

A. A bank that offers 4% interest
B. A bank that offers 3% interest
C. A bank that offers 2.5% interest
D. A bank that offers 3.5% interest



Answer :

GinnyAnswer
Certainly! Let's determine which bank option would be the best for Veronica, considering the current inflation rate of 2.5%.

### Step-by-Step Solution:

1. Interest Rates Offered by the Banks:
- Bank 1: 4% interest
- Bank 2: 3% interest
- Bank 3: 2.5% interest
- Bank 4: 3.5% interest

2. Inflation Rate:
- Current inflation rate is 2.5%.

3. Calculate the Real Interest Rate:
To find the real interest rate, we subtract the inflation rate from the nominal interest rate offered by each bank.

- Bank 1:
[tex]\[ \text{Real Interest Rate} = 4\% - 2.5\% = 1.5\% \][/tex]

- Bank 2:
[tex]\[ \text{Real Interest Rate} = 3\% - 2.5\% = 0.5\% \][/tex]

- Bank 3:
[tex]\[ \text{Real Interest Rate} = 2.5\% - 2.5\% = 0.0\% \][/tex]

- Bank 4:
[tex]\[ \text{Real Interest Rate} = 3.5\% - 2.5\% = 1.0\% \][/tex]

4. Compare the Real Interest Rates:
- Real interest rates for the banks are:
- Bank 1: 1.5%
- Bank 2: 0.5%
- Bank 3: 0.0%
- Bank 4: 1.0%

5. Determine the Best Option:
- The highest real interest rate is 1.5%, which is offered by Bank 1.

Therefore, the best option for Veronica, considering the current inflation rate of 2.5%, is a bank that offers 4% interest.

Hence, the correct choice is:
- A bank that offers 4% interest

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