Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:

Question

Quizplus · Accepted Answer

Compounding refers to earning interest on both the original investment and the accumulated interest from previous periods. This is what Christina is doing by leaving her interest earnings in her account, therefore B is the correct choice. The other options (simplifying, aggregating, accumulating, discounting) do not accurately describe Christina's handling of her interest income.

Christina Invested $3,000 Five Years Ago and Earns 2 Percent