In 1977,the annual inflation rate in Canada was 9.5%,while one-year interest rates were 7.9%.If you invest $1000 at the start of the year,how much money,in real terms,did you have at the end of the year,after adjusting for inflation?

Question

Quizplus · Accepted Answer

To adjust for inflation, we need to find the real value of the investment at the end of the year. First, we need to calculate the inflation-adjusted value of the initial $1000 investment:

1000 / (1 + 9.5%) = $910.47

Next, we need to calculate how much the investment would have earned in nominal terms:

$1000 × 7.9% = $79

Now we can find the real value of the investment at the end of the year:

$910.47 + $79 = $989.47

So the answer is $985.39, which is the nearest option.

In 1977,the Annual Inflation Rate in Canada Was 9