A person invests $2000 today in a fund earning interest at j₁ = 6%.If the rate of inflation is 2.1% in the first year and 3.0% in the second year,how much is the investment worth,in real terms (after taking account of inflation),at the end of two years? A)$2131.30 B)$2136.87 C)$2138.15 D)$2140.34

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Quizplus · Accepted Answer

To calculate the real value of the investment after two years, taking into account inflation, we first calculate the nominal value of the investment after two years using the given interest rate of 6%. Then, we adjust this nominal value for inflation over the two years.1. Calculate the nominal value of the investment after two years:$$ \text{Nominal value after 2 years} = \$2000 \times (1 + 0.06)^2 = \$2000 \times 1.1236 = \$2247.20 $$2. Adjust for inflation:- After the first year, inflation is 2.1%. The equivalent value at the end of the first year, adjusted for inflation, is:$$ \text{Adjusted for first year inflation} = \frac{\$2247.20}{1 + 0.021} = \$2200.58 $$- After the second year, inflation is 3.0%. The real value at the end of the second year, adjusted for the second year's inflation, is:$$ \text{Real value after 2 years} = \frac{\$2200.58}{1 + 0.03} = \$2136.87 $$Therefore, the investment is worth $2136.87 in real terms at the end of two years, taking into account the inflation rates for each year.

A Person Invests $2000 Today in a Fund Earning Interest