Question

Julia invested $3,000 at an annual interest rate of 5 percent. From last year to this year, there has been a 4 percent inflation rate. After a year, the purchasing power of her investment _____.

Answer 1

The purchasing power of her investment is
It increases 5%-4%=1%

Answer 2

The purchasing power of investment = 1% or $100

Explanation:

Given : Amount invested=$3,000 ,last year interest rate 5% and this year interest rate 4%

Using formula :
`A=P(1+r)^t`

where,

P = principal amount = 3,000

`r_1` = annual rate of interest last year = 5%= 5/100=0.05

`r_2` = annual rate of interest this year = 4%= 4/100=0.04

t = number of years the amount is deposited =1

A = amount of money accumulated have to find

→ Amount of last year (r=0.05)

`A_1=P(1+r_1)^t`

`A_1=3000(1+0.05)^1`

`A_1=300(1.05)`

`A_1=3150`

→ Amount of this year (r=0.04)

`A_2=P(1+r_2)^t`

`A_2=3000(1+0.04)^1`

`A_2=300(1.04)`

`A_2=3120`

Now, Purchasing power of investment - The base year’s CPI and divide it by the target year’s CPI, then multiply your answer by 100 is the purchasing power.

which means Purchasing power =
`(A_1)/(A_2)* 100`

=
`(3150)/(3120)* 100`

=
`1.009* 100`

= 100

Therefore, the purchasing power of investment = 1% or $100