A saver has $2500 on deposit in an acct. earning 5% interest. During this yr., the inflation rate was 6%. After one yr. what is the buying power of the amount of savings for that person?
To determine the buying power of the amount of savings after one year, we need to consider the effects of both the interest earned and the inflation rate on the original deposit.
Step 1: Calculate the interest earned on the savings:
Interest = Principal × Rate
Interest = $2500 × 5% = $125
Step 2: Calculate the new savings amount after interest is added:
New Savings = Principal + Interest
New Savings = $2500 + $125 = $2625
Step 3: Calculate the impact of inflation on the savings:
Inflation = New Savings × Inflation Rate
Inflation = $2625 × 6% = $157.5
Step 4: Calculate the buying power of the savings after one year:
Buying Power = New Savings - Inflation
Buying Power = $2625 - $157.5 = $2467.5
Therefore, after one year, the buying power of the savings for that person is $2467.5. This means that due to the inflation rate of 6%, the savings have decreased in terms of their purchasing power.