Final answer:
True, The effective annual rate indeed increases with more frequent compounding periods. Compound interest on a sum of money results in exponential growth over time, highlighting the importance of understanding compounding in financial planning.
Step-by-step explanation:
When interest is compounded more frequently, each interest payment will itself earn interest in subsequent periods. For instance, saving an amount at a 7% annual interest rate compounded annually will yield less than the same interest rate compounded semi-annually, which in turn is less than if it were compounded quarterly, and so on. Understanding compound interest is essential for making informed financial decisions. For example, if you start with >$3,000 and assume a 7% real annual rate of return, compounding annually for 40 years, this amount will grow significantly. Using the compound interest formula, the saving will be $44,923, illustrating the power of compound interest over time.