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  • inflation $= 3\%$ per year,

  • amount of time $= 5$ years,

  • nominal value = $\$5070.6$,

  • real value = ?

  • real value* $1.03^5 = \$5070.6 $, real value = 4373.94, this is correct answer

  • why not : $5070.6\times(1-0.3)^5 =$ real value, which gives answer $\$4354.3$ for real value

Sam
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  • If $$5070.6$ is the value at $t=0$, then at $t=5$ the real value is $$5070.6\cdot (1-0.03)^5=$ 4345.3$. So you're right. – callculus42 Oct 13 '22 at 20:24
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    @callculus42 - No, they are not. The inflation rate is the percentage increase of prices this year over prices last year, not the percentage decrease of prices last year over prices this year, which is what the $(1-0.03)^5$ is treating it as. $\frac 1{1+x}\ne (1-x)$. – Paul Sinclair Oct 14 '22 at 11:51
  • @PaulSinclair Yes, I agree. Thanks for the correction. – callculus42 Oct 14 '22 at 22:05

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