If you had $2,000 in a savings account that paid 4% interest compounded annually, what would be the real value of your savings after two years if the annual inflation rate were 2%?
A)$2,040
B)$2,081
C)$2,160
D)$1,163
E)$2,247

Question

Quizplus · Accepted Answer

After one year, the savings account would be worth $2,080 ($2,000 x 1.04). However, because inflation is 2%, the real value of this amount is reduced by 2%, making it worth only $2,032 ($2,080 / 1.02). After two years, the savings account would be worth $2,163.20 ($2,080 x 1.04), but adjusting for inflation, the real value would be $2,081.18 ($2,163.20 / 1.02). Therefore, the best choice is B.

If You Had $2,000 in a Savings Account That Paid