A saver has $2,600 on deposit in an account earning 6 percent interest. During this year, the inflation rate was 7 percent. After one year, what is the buying power of the amount in savings for that person?

Question

Rangel

Business

25 August, 07:03

A saver has $2,600 on deposit in an account earning 6 percent interest. During this year, the inflation rate was 7 percent. After one year, what is the buying power of the amount in savings for that person?

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Jaylynn Grant · Answer 1

Maintaining the nominal value of purchasing power. After one year the individual will have $2,574 (in real purchasing power terms)

Explanation:

Giving the following information:

A saver has $2,600 on deposit in an account earning 6 percent interest. During this year, the inflation rate was 7 percent.

The interest rate increases the purchasing value of the individual. On the contrary, the inflation rate decreases the purchasing value. The problem resides when the inflation rate is higher than the interest rate. The real purchasing power decreases.

Real interest rate = 0.06 - 0.07 = - 0.01

Final value = 2,600*0.99 = $2,574 (in real purchasing power terms)