Suppose you postpone consumption so that by investing at 5% you will have an extra $500 to spend in one year.Suppose that inflation is 2% during this time.What is the approximate real increase in your purchasing power?
A)$800
B)$500
C)$300
D)$200

Question

Quizplus · Accepted Answer

To calculate the real increase in purchasing power, we need to take into account inflation.

First, let's calculate how much we would have in one year if we invest at 5%:

$500 / 0.05 = $10,000

So, we would have $10,000 in one year.

Now, let's adjust this amount for inflation:

$10,000 * (1 - 0.02) = $9,800

This is the amount in today's dollars, adjusted for inflation.

So, the real increase in purchasing power is:

$9,800 - $9,500 = $300

Therefore, the best choice is C.

Suppose You Postpone Consumption So That by Investing at 5