Assume the inflation rate is 4% per year and the market interest rate is 5% above the inflation rate.
Determine (a) the number of constant-value dollars 5 years in the future that is equivalent to $30,000
now and (b) the number of future dollars that will be equivalent to $30,000 now.
The market interest rate is the rate of interest prevailing which is being offered on cash deposits.
Using the formula,we find out nominal rate of interest,
=17.6% or 0.176
(where nr=nominal rate,rr=real rate of interest,i=inflation rate)
Using the formula,we find out future value,
Hence,correct option is B.