Question

You have $64,000 in a savings account that pays 2% annual interest and the

inflation rate is 3.24%. How much buying power in dollars will you lose in one
year because of inflation?
A. $793.60.
B. $1,280.00
C. $2,073.60
D. $3,354.60.

Answer 1

$793.60

Step-by-step explanation:

Inflation refers to the general increase in prices. It reduces or erodes the purchasing power of a currency.

Interest rate represents the rate of money growth from an investment or savings.

Inflation will, therefore, decrease purchasing power while interest rate will add to the currency strength. Loss or gain in purchasing power will be determined by the difference between the inflation rate and the interest rates.

In this case, the loss in purchasing power will be the inflation rate (3.24%) - interest rate (2%).

=3.24%-2%

=1.24%

1.4% decline in purchasing power will equal to 1.4% x $64,000

= 1.24/100 x $64,000

=0.0124

=$793.60