Question

Suppose that you invest $7,000 today at an annual rate of 9%. Assuming that the expected annual rate of inflation is 4%, what will be your increase in purchasing power in percentage terms? Enter your answer as a percent without the “%.” Round your final answer to two decimals. Im mid exam pls need answer ASAP

Answer 1

As we have $7000 today at anuual rate of 9% considering it as nominal so after 1 year we get 7000(1.09) = $7630

Inflation environment in that year is 4% where Real rate of return is 1.09/1.04 - 1 = 0.048076 or 4.8076%if you buy before at $1 now it will cost you $ 1.04 whereas your returns by way of interest are $1 + 9%= 1.09

hence the increase in purchasing power is (7336.532 - 7000)/7000 is 4.81

Hope this will help, Gud Luck!