Answer:
a. The real value of your savings is $5,454.55.
b. The real value of your savings is $6,315.79.
Explanation:
The real value of savings can be calculated using the following formula:
Real value of savings value = Savings amount / (Current price index / Previous price index) ..................... (1)
Therefore, we have:
a. What is the real value of your savings if the price level increases by 10 percent for the year?
Savings amount = $6,000
Previous price index = 100
Current price index = Previous price index + Percentage increase in the price level = 100 + 10 = 110
Substituting all the relevant values into equation (1), we have:
Real value of savings = $6,000 / (110 / 100) = $5,454.55
Therefore, the real value of your savings is $5,454.55.
b. What is the real value of your savings if the price level declines by 5 percent for the year?
Savings amount = $6,000
Previous price index = 100
Current price index = Previous price index - Percentage decrease in the price level = 100 - 5 = 95
Substituting all the relevant values into equation (1), we have:
Real value of savings = $6,000 / (95 / 100) = $6,315.79
Therefore, the real value of your savings is $6,315.79.