Question

miranda has put aside \\$5,000 in a savings account earning a nominal interest rate of 3\\%. over the first year, she earns \\$150 in interest. however, the rate of inflation is 6\\%. what is the actual purchasing power of mirandas savings?

• \\$4,850
• \\$5,000
• \\$5,150
• \\$5,300

Explanation:

Calculate nominal value after one year

$$ \text{Nominal Value} = \$5,000 + \$150 = \$5,150 $$

Adjust for inflation rate of 6%

$$ \text{Purchasing Power} = \frac{\text{Nominal Value}}{1 + \text{Inflation Rate}} = \frac{\$5,150}{1 + 0.06} $$

Compute final actual purchasing power

$$ \text{Purchasing Power} = \frac{\$5,150}{1.06} \approx \$4,858.49 \approx \$4,850 $$

Answer:

• (A) $4,850 (Correct answer)
• (B) $5,000
• (C) $5,150
• (D) $5,300