Question

Suppose you have $200,000 in a bank term account. You earn 5% interest per

Answer 1

Answer:

Kindly check explanation

Explanation:

Account balance or principal = $200,000

Interest rate per annum = 5% = 0.05

Actual inflation rate for the year = 6% = 0.06

Period = 1 year

Amount at the end of one year:

Principal × ( period + interest rate)

$200,000 × ( 1 + 0.05)

$200,000 × (1.05) = $210,000

With anticipated inflation rate of 4% :

$200,000 × ( 1 + 0.04)

$200,000 × (1.04) = $208,000

Purchasing power = $208,000

At this rate of inflation, $208,000 will buy us what $200,000 can buy today.

Excess amount = $210,000 - $208,000 = $2000

$2000 will be earned if the principal is placed in bank.

With actual inflation rate of 6% :

$200,000 × ( 1 + 0.06)

$200,000 × (1.06) = $212,000

Purchasing power = $212,000

With inflation rate of 6%, $200,000 today will be equivalent to $212,000 after one year and as such will be required to purchase the same items $200,000 can today.

Deficit amount = $210,000 - $212,000 = $(2000) deficit