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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
= 53,083.89 dollars
(the growing effective multiplicative factor is = 1.061678, rounded).
Inflation with the annual rate of 6.5% will make $50,000 equivalent to
= 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.