Samantha deposits $1,000 in a saving account that pays an annual interest rate of 4 percent.Over the course of a year the inflation rate is 1 percent.At the end of the year Samantha has

Question

Quizplus · Accepted Answer

After one year, Samantha's account will have:
- $1,000 + 4% * $1,000 = $1,040 due to the interest earned
However, due to inflation, the purchasing power of her money has decreased by 1%, which means that she can now buy 1% less than before. Her purchasing power is now:
- $1,000 - 1% * $1,000 = $990

So, she has $1,040 in her account, but it's worth $990 in purchasing power. Her actual gain in purchasing power is therefore:
- $990 - $1,000 = -$10

This means that in reality, Samantha has lost purchasing power over the year, despite earning interest. However, her account balance has still increased, so the answer cannot be A or D.

The only answer choice that reflects this is C: she has $40 more in her account, but her purchasing power has only increased by about $30.

Samantha Deposits $1,000 in a Saving Account That Pays an Annual