The historical average rate of inflation in the United States is 4%. If you bury $727....

The historical average rate of inflation in the United States is 4%. If you bury $727. What will the buying power of that money be in todays dollars in 20 years?

Solutions

Expert Solution

If today we will bury $ 727 under ground today T = 0

Inflationary rate if 4 %

Assume today you can purchase something by paying $100 at an inflationary rate of 4% you will be able to purchase commodity 0.96 i.e., $96. similarly the value of $1 after 20 years will be equal to (1-0.04)²⁰ = $ 0.442

therefore $727 will be worth = $727 * 0.442 = $321.3358.

See with the passage of time the value of money declines. As you have buried $727 so it will not grow it will remain the same. Let us assume today you can purchase 1 unit of a commodity by paying $1 with an inflation of 4 % its price after a year would be $1(1+0.04) = $1.04 Similarly after 20 years it will be worth $1(1.04)^20 =

Thus if you invest $1 at a rate of 4% for 20 years it will grow to $1(1.04)^20 but you have not invested it so its worth will be $1/1.04^20 = $0.456 thus $727 will be worth = 727*0.456 = $331.79 both values approximately same. difference is due to method

Rahul Sunny answered 1 year ago

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