Suppose you have $200,000 in a bank term account. You earn 5% interest per

annum from this account.

You anticipate that the inflation rate will be 4% during the year. However, the

actual inflation rate for the year is 6%.

Calculate the impact of inflation on the bank term deposit you have and

examine the effects of inflation in your city of residence with attention to food

and accommodation expenses.

Kindly check explanation

Explanation:

Account balance or principal = $200,000

Interest rate per annum = 5% = 0.05

Actual inflation rate for the year = 6% = 0.06

Period = 1 year

Amount at the end of one year:

Principal * (period + interest rate)

$200,000 * (1 + 0.05)

$200,000 * (1.05) = $210,000

With anticipated inflation rate of 4%:

$200,000 * (1 + 0.04)

$200,000 * (1.04) = $208,000

Purchasing power = $208,000

At this rate of inflation, $208,000 will buy us what $200,000 can buy today.

Excess amount = $210,000 - $208,000 = $2000

$2000 will be earned if the principal is placed in bank.

With actual inflation rate of 6%:

$200,000 * (1 + 0.06)

$200,000 * (1.06) = $212,000

Purchasing power = $212,000

With inflation rate of 6%, $200,000 today will be equivalent to $212,000 after one year and as such will be required to purchase the same items $200,000 can today.

Deficit amount = $210,000 - $212,000 = $ (2000) deficit