Jordan leaves 5000 in an account paying 4.15% pa compounded annually for 2 years.
Inflation runs at 3.5% pa in year 1 and 5.2% pa in year 2.
Has the real value of the 5000 increased or decreased?
The answer is: decreased by 20.49
Can someone please tell me how i go about answering this question?
PS - Your use of dollar symbol in OP has led to the truncation of the text you entered, I suggest you edit the OP by removing the dollar symbols from money amounts so all of the text is displayed as you intended
Real rate = nominal rate - inflation rate
real rate = (4.15%-3.5%)
real rate = 0.0065
Y1 = 5000 * (1+0.0065)
Y1 = 5000 * 1.0065
Y1 = 5032.5
real rate = (4.15%-5.2%)
real rate = -0.0105
Y2 = 5032.5 * (1-0.0105)
Y2 = 5032.5 * 0.9895
Y2 = 4979.65875
Real Value = 4979.65875 - 5000
Real Value = -20.34