Final answer:
The concept where the earned interest is added to the principal for further interest calculation is called compound interest. It causes savings to grow exponentially over time and is different from simple interest, which is only calculated on the initial principal.
Step-by-step explanation:
When the amount earned on a deposit has become part of the principal at the end of a specified time period, this concept is known as compound interest. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal amount plus any accumulated interest from previous periods. The formula to calculate the future value with compound interest is:
Future Value = Principal x (1 + interest rate)^time
Then, to find the actual compound interest earned, you subtract the principal from the future value:
Compound interest = Future Value - Principal
This allows the savings to grow exponentially over time, as the interest in each period is added to the principal for the calculation of the next period's interest.