Given the average compound annual inflation rate of 4%, how much would $1,000 be worth in terms or purchasing power six years from today expressed in current dollars?

Question

Quizplus · Accepted Answer

To find the future value in terms of current purchasing power, we need to adjust for inflation. Using the formula FV = PV x (1 + inflation rate)^n, where FV is future value, PV is present value, and n is the number of years, we get FV = $1,000 x (1 + 0.04)^6 = $1,295.96. To adjust for inflation, we need to divide this by (1 + 0.04)^6 to get the answer in current dollars: $1,295.96 / (1 + 0.04)^6 = $1,090.30. Therefore, $1,000 in six years will be worth $1,090.30 in current dollars, which is a decrease in purchasing power of $90.30. The closest answer choice to this is B: $790.30, which is off by $300. This makes it the best choice.

Given the Average Compound Annual Inflation Rate of 4%, How