Question

1. 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.

Answer 1

we can ultimately conclude the following decision.

IMPACT OF INFLATION

ON INVESTMENT(bank term deposit)-since the anticipated inflation rate is less than the actual inflation rate,we can observe from the above solution that the bank interest is not enough to protect the value of capital invested at prevailing rate and the value of investment is declining.

IMPACT ON FOOD AND ACCOMMODATION (cost of living)- comparing to the present year the cost of living and expenditure concerned with food and residence are tend to increase by 6%,which means it would become costly to live in the city if there is no increase in income.

therefore it is advisable to gain a return of greater than or equal to 6% and same is expected in salary increment.