Question

Suppose you have $8,295 in savings when the price level index is at 100. If inflation pushes the price level up by 9 percent, calculate the real value of your savings.

Answer 1

Answer: To calculate the real value of your savings after inflation, you need to adjust your savings for the increase in the price level. Here's how to do it:

Calculate the amount of inflation:

Inflation rate = (New price level index - Old price level index) / Old price level index

In this case, the old price level index is 100, and the new price level index is 109 (100 + 9%). So:

Inflation rate = (109 - 100) / 100 = 0.09

Adjust your savings for inflation:

Real value of savings = Nominal value of savings / (1 + inflation rate)

In this case:

Real value of savings = 8,295 / (1 + 0.09) = 7,614.22

Therefore, the real value of your savings after inflation is $7,614.22.

Explanation: