Final answer:
2) compound
The investment is earning compound interest, as seen by the increasing amount of interest earned each year. Unlike simple interest, which remains constant, compound interest leads to interest being earned on previously earned interest.
Step-by-step explanation:
An investor deposits $100.00 and earns $6.00 of interest in the first year and $6.36 in the second year. This means the investor is earning interest that is calculated on the initial amount plus any interest from previous periods. This is known as compound interest.
For instance, if the investment were earning simple interest, only the initial deposit would generate interest, and the interest amount would remain constant each year. An example of simple interest is if you deposit $100 at a simple interest rate of 5%, held for three years, the calculation would be $100 × 0.05 × 3 = $15. In this case, you would earn $15 regardless of the number of years.
In contrast, with compound interest, the interest earned in the first year is added to the initial amount, and the new total becomes the base for calculating the second year's interest. As shown in Step 8, after three years with a compound interest rate, the total would be $115.76. This is higher than the amount earned from simple interest by $0.76, which was only $15.