If you had $4,000 in a savings bank that pays you 2% interest per year, what would be the real value of your savings after 2 years and the yearly inflation rate were 3% per year?

Question

Quizplus · Accepted Answer

After one year, the savings account with 2% interest would be worth $4,080 ($4,000 x 1.02). However, due to the 3% annual inflation rate, the value of money decreases by 3%, leaving the savings account with a real value of $3,950.40 ($4,080/1.03). After two years, the savings account with 2% interest would be worth $4,166.41 ($4,080 x 1.02), but with inflation, the real value would be reduced to $3,959.08 ($4,166.41/1.03). Therefore, the best choice is A).

If You Had $4,000 in a Savings Bank That Pays