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27 December, 22:24

Question Suppose you have $200,000 in a bank term account. You earn 5% interest per annum from this account. You anticipate that the inflation rate will be 4% during the year. However, the actual inflation rate for the year is 6%. Calculate the impact of inflation on the bank term deposit.

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  1. 28 December, 01:15
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    Deposited amount will decrease by 1% and $2,000

    Explanation:

    Inflation rate will effect the value of money due to decrease in purchasing power of the currency holder.

    We will use following formula to calculate the impact

    Nominal rate = Real interest rate + Inflation rate

    5% = Real interest rate + 6%

    Real interest rate = 5% - 6% = - 1%

    The deposited amount will be decreased by 1%.

    Deposit value = $200,000 x (1 - 1%) = $198,000

    Decrease in value = $200,000 - $198,000 = $2,000
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