A $35,000 investment grew to a nominal value of $45,000 after 5 years. During this time, the CPI rose from 100 to 140 What happened to the real value of the investment over this period, considering inflation? Use the present value formula: present value is equal to the fraction with numerator future value and denominator future CPI over current CPI
Answer
A
The real value of the investment grew faster than inflation.
B
The investment lost all real value due to inflation.
C
The real value remained the same, keeping up with inflation.
D
The nominal value increased, but the real value declined.
Explanation
Adjust the final nominal value for the CPI increase: $45,000 × (100 ÷ 140) ≈ $32,143 in the purchasing power of the starting year. That is less than the original $35,000, so the investment’s nominal value increased while its real value declined. The correct choice is “The nominal value increased, but the real value declined.”
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