5 Use the table below and use the following equation. Savings / [(1 00 + inflati

Question

5 Use the table below and use the following equation. Savings / [(1 00 + inflation rate)10] Annual Inflation Rate 10 Percent $1,000 909 826 751 6 Percent 8 Percent 4 Percent $1,000 962 Year 2 Percent $1,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $1,000 980 961 942 924 906 943 890 840 792 747 705 665 592 592 558 857 889 855 822 790 760 703 735 621 564 513 424 681 584 871 853 837 820 500 386 676 What would the real value be in 10 years of $100 you hid under your mattress if the inflation rate is (a) 2% (b) 8%

Explanation / Answer

a) The value of $100 after ten years with an inflation rate of 2% will be only $82, because of inflation the money is losing its value.

b) In ten years at an inflation rate of 8%, the real value of $100 will reduce to 46.3.

Now, I know you must be facing a problem with the equation given.. just do one simple thing, do

it as saving / (1.00 + inflation rate / 100) ^10. because inflation is given in percentage write it as it is not just 2.

Using the equation 100 / (1.00 + 2/100 )^10 we get 98 for the first year and so on.  

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