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If the nominal interest rate is 8% and the inflation rate is 5%. Using the relevant real interest rate formula, what is the future value of an $1500 investment in one year?

Question

If the nominal interest rate is 8% and the inflation rate is 5%. Using the relevant real interest rate formula, what is the future value of an $1500 investment in one year?

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Solution

The real interest rate can be calculated using the Fisher equation, which is:

Real Interest Rate = [(1 + Nominal Interest Rate) / (1 + Inflation Rate)] - 1

First, let's calculate the real interest rate:

Real Interest Rate = [(1 + 0.08) / (1 + 0.05)] - 1 = 0.02857 or 2.857%

The future value of an investment can be calculated using the formula:

Future Value = Present Value * (1 + Real Interest Rate)

Now, let's calculate the future value of the $1500 investment in one year:

Future Value = 1500(1+0.02857)=1500 * (1 + 0.02857) = 1542.85

So, the future value of a 1500investmentinoneyear,givenanominalinterestrateof81500 investment in one year, given a nominal interest rate of 8% and an inflation rate of 5%, is approximately 1542.85.

This problem has been solved

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