SOLUTION: A man deposits P50, 000 in a bank account at 6% compounded monthly for 5 years. If the inflation rate of 6.5% per year continues for this period, will this effectively

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Question 1187476: A man deposits P50, 000 in a bank account at 6% compounded monthly for 5 years. If the inflation rate of 6.5% per year continues for this period, will this effectively protect the purchasing power of the original principal?
Answer by ikleyn(52787) About Me  (Show Source):
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A man deposits P50, 000 in a bank account at 6% compounded monthly for 5 years.
If the inflation rate of 6.5% per year continues for this period, will this effectively protect
the purchasing power of the original principal?
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To answer this question, it is NOT NECESSARY to analyse the 5-years time period.


It is quite enough to look what will happen at the end of the first year.


Compounding monthly will produce at the end of the first year the value of


    50000%2A%281+%2B+0.06%2F12%29%5E12 = 53,083.89  dollars


(the growing effective multiplicative factor is  %281%2B0.06%2F12%29%5E12 = 1.061678, rounded).




Inflation with the annual rate of 6.5% will make $50,000  equivalent to  


    50000%2A1.065 = 53250  dollars


at the end of the first year (the growing effective multiplicative factor is  (1+0.065) = 1.065).



Comparing these values, you conclude that the inflation OVERTAKES the compounding account.

Solved.