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4. You just deposited $3,500 into a bank account and the current real interest rate is at r = 2% and inflation is expected to

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Answer #1

a) Nominal rate of interest = real interest rate + rate of inflation (expected) = 2% + 3% = 5%

b) Use FV = PV * (1 + i)^n to get FV = 3500*(1 + 5%)^1 = $3,675

c) Now n = 2 and so FV = 3500*(1 + 5%)^2 = $3,858.75

d) In three years you will be able to accumulate 3500*(1 + 5%)^3 = $4,051.69.

This is enough for buying a used car at $4,025

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