Question

Instead of investing a lump of sum of $25000,Brittany Royer decides to svae the money in a vault for 2years. Assuming the inflation being 2.5%per year,how much will her purchasing power decline in 2years

Answer 1

$1265.63

Step-by-step explanation:

Inflation is a persistent rise in the general price levels

Types of inflation

1. demand pull inflation – this occurs when demand exceeds supply. When demand exceeds supply, prices rise

2. cost push inflation – this occurs when the cost of production increases. This leads to a reduction in supply. Higher prices are the resultant effect

Loss in purchasing value = future value of the amount saved - amount saved

The formula for calculating future value:

FV = P (1 + r)^n

FV = Future value

P = Present value

R = interest rate

N = number of years

$25000 (1.025)² = $26.265.625

Amount lost = $26.265.625 - $25,000 = $1265.63