# Thread: Investment & Loans: The effect of inflation

1. ## Investment & Loans: The effect of inflation

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.

2. ## Re: Investment & Loans: The effect of inflation

What is the exact and complete wording of the problem. (Oh, please don't use dollar signs.)

3. ## Re: Investment & Loans: The effect of inflation

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

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

Code:
Real rate = nominal rate - inflation rate
Year 1

Code:
real rate = (4.15%-3.5%)
real rate = 0.0065

Y1 = 5000 * (1+0.0065)
Y1 = 5000 * 1.0065
Y1 = 5032.5
Year 2

Code:
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

Code:
Real Value = 4979.65875 - 5000
Real Value = -20.34

4. ## Re: Investment & Loans: The effect of inflation

Oh wow, thank you!
Also, thanks for the PS, i didn't know about the dollar sign. I can't seem to find the edit button anywhere but i will remember it for future reference!