Explain why keeping the same number of shekels does not necessarily preserve purchasing power.
Inflation is a rise in the general price level over time.
When prices rise, the same amount of money buys less. Nominal return describes the change in money; real return also accounts for the change in the price level. A rise in the price of a single product is not by itself a measure of the whole economy.
100 ₪ bought a certain basket. If that same basket now costs 105 ₪, the same 100 ₪ is no longer enough for it.
Explain why keeping the same number of shekels does not necessarily preserve purchasing power.
A basket once cost 100 and now costs 105, a rise of 5%. Keeping 100 buys less of that basket. Even if your money grows to 103, purchasing power has not necessarily increased: compare 103 with the new cost of 105, not just the old balance of 100. Your personal spending basket can also differ from the basket used in a general consumer price index.
Concepts that help you compare
Compound Interest: Time Makes a Difference
Compound interest is earning interest on interest that has already been added. The calculation depends on the rate and the compounding frequency. In investments returns can vary and be negative, so an example with fixed interest is just an illustration. Fees, taxes and withdrawals change the outcome.
Comparison example: Assuming a constant 5% per year: 100 ₪ becomes 105 ₪ after one year and 110.25 ₪ after two years, before costs.
A deposit is an agreement with the bank to place money under specified interest and for a set period. A checking account is used for regular payments. With a deposit you check the interest rate, the period and exit points. With a money market fund you check the policy, costs and redemption terms; the return is not predetermined as a guarantee. Choosing requires understanding the goal and the terms, not just comparing a single number.
Comparison example: An offer for one year and an offer for one month are not the same even if both show the same annual interest rate.