a SAVER HAS A $1000 ON DEPOSIT IN AN ACCOUNT EARNING 3 PERCENT INTEREST. dURING THIS YEAR THE INFLATION RATE WAS 5 PERCENT. AFTER ONE YEAR EHAT IS THE BUYING POWER OF THE AMOUNT IN SAVINGS FOR THAT PERSON?
$1000 x 0.03 = 30 so the saver as $1030 at the end of the year.
But $1030 is worth only 1030 x 0.95 = $978.50 buying power using the previous year as a base.
To find out the buying power of the amount in savings after one year, we need to take into account both the interest earned on the savings and the inflation rate.
First, let's calculate the interest earned on the savings. The savings account has a balance of $1000 and earns 3 percent interest. To calculate the interest amount, we multiply $1000 by 3 percent (0.03):
Interest earned = $1000 * 0.03 = $30
Therefore, the interest earned on the savings in one year is $30.
Next, let's calculate the inflation rate. The inflation rate for one year is given as 5 percent.
To calculate the inflation-adjusted buying power of the savings, we need to subtract the inflation rate from the interest earned:
Buying power = Interest earned - Inflation rate
= $30 - (5 percent of $1000)
= $30 - ($1000 * 0.05)
= $30 - $50
= -$20
The result is -$20, indicating a decrease in the buying power of the savings after one year. This means that due to the 5 percent inflation rate, the savings have lost $20 worth of purchasing power.