Suppose John deposits some money in an investment account that offers 5% interest rate per year. Annual inflation is expected to be 3.5% over the next 5 years. What is the inflation rate per half a year?
A)1.50%
B)1.73%
C)1.75%
D)1.78%
E)1.80%

Question

Quizplus · Accepted Answer

The annual inflation rate is 3.5%, so to find the semi-annual (half-year) inflation rate, we use the formula for converting annual rates to semi-annual rates: (1 + annual rate)^(1/2) - 1. Plugging in 3.5% or 0.035 into the formula gives us (1 + 0.035)^(1/2) - 1 = 0.01725 or 1.73%.

Suppose John Deposits Some Money in an Investment Account That