Question

Inflation causes things to cost more, and for our money to buy less (hence your grandparents saying "In my day, you could buy a cup of coffee for a nickel"). Suppose inflation decreases the value of money by 5% each year. In other words, if you have $1 this year, next year it will only buy you $0.95 worth of stuff. How much will $100 buy you in 25 years?

Answer 1

Inflation rate = 5 % = 5/100 = 0.05 ( decimal form)

Money = $100

Time = 25 years

Apply:

Reduced amount = amount x ( 1 - inflation rate )^ t

RA = 100 ( 1 - 0.05 )^25

RA = $27.74

Answer: $27.74