Question

Suppose a homeowner refuses to sell a house for a price below $150,000. Say five years go by and the inflation rate averaged 2% per year. If the homeowner now sells for $150,000, did he sell at a lower real price? I.e., is the $150,000 he finally sells for worth less in terms of goods and services after five years of inflation?

Answer 1

ANSWER:

Real value of $150,000 which is sold after 5 years is:

real value = selling price of home(p/f,i,n)

i = 2%

n = 5 years

real value = 150,000(p/f,2%,5)

real value = 150,000 * 0.9057

real value = 135,855

so the real value of selling price is $135,855 which is lower then the nominal price of $150,000.