Question

Inflation is running at 1.2% per year when you deposit $11,000 in an account earning 6% compounded monthly. In constant dollars, how much money will you have four years from now?

Answer 1

Answer:

$13,316.54

Explanation:

Data provided in the question:

Inflation rate, i = 1.2% = 0.012

Deposits = $11,000

Interest rate, r = 6% = 0.06

Time, t = 4 years

since compounded monthly, number of periods n = 12

Now,

Future value of money with the interest

= Deposits × $[1+ \frac{r}{n}]^{n.t}$

= $11,000 × $[1+ \frac{0.06}{12}]^{12\times4}$

= $13,975.38

Considering the inflation,

Amount after 4 years = Future value × [1 - i ]ⁿ

= $13,975.38 × [1 - 0.012]⁴

= $13,316.54