Compounding and Purchasing Power
Compounding and Purchasing Power
IB Year 5 | Grade 11
7 marks
TGM Original
A savings account holds $8,000. It pays a nominal annual interest rate of 3.6%, compounded quarterly. Inflation is 5% per year. Assume constant rates and no fees, withdrawals or further deposits. - Calculate the effective annual interest rate. - Find the account balance after four years and its purchasing power in dollars at the start of the four years. Give monetary answers to the nearest cent. - Determine the percentage change in purchasing power and interpret its sign.
Solution:
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Answer:(a) \(3.648892\ldots\%\); (b) \(\$9\,233.12\), real value \(\$7\,596.11\); (c) \(5.05\%\) decrease.
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