A bank offers me 10% annual interest on an investment, but the inflation rate is 5%. If I invest $500 in the bank, what will the value of my investment be, in real dollars, in five years time?
A)$396
B)$631
C)$638
D)$805
E)$1 028

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate, which is 10% - 5% = 5%. Using the formula for compound interest, the future value in real dollars is $500 * (1 + 0.05)^5 = $638.14, which is closest to $631.

A Bank Offers Me 10% Annual Interest on an Investment