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Math Help - Investment & Loans: The effect of inflation

  1. #1
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    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.

    Can someone please tell me how i go about answering this question?
    Last edited by dumbblonde; April 14th 2014 at 09:13 PM.
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  2. #2
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    Re: Investment & Loans: The effect of inflation

    What is the exact and complete wording of the problem. (Oh, please don't use dollar signs.)
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  3. #3
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    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

    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

    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
    Thanks from dumbblonde
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  4. #4
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    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!
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