Final answer:
The real value of $2,000 in a savings account at the end of the year, with a price level increase from 100 to 120, is $1,600, after adjusting for a 20% inflation rate.
Step-by-step explanation:
If you have $2,000 in a savings account at the beginning of the year and the price level is equal to 100, and then by the end of the year the price level rises to 120, you are dealing with inflation and the change in purchasing power. To find the real value of your savings at the end of the year, you can adjust the original amount of money by the increase in the price level.
The calculation to find the real value is as follows:
- Original price index: 100
- End of year price index: 120
- Percentage increase in price level: (120 / 100) - 1 = 0.20 or 20%
- Decrease in real value due to inflation: $2,000 * 20% = $400
- Real value of savings: $2,000 - $400 = $1,600
Therefore, the real value of your savings at the end of the year is closest to $1,600.