michael has been saving his money and wants to invest it. after doing some research, he has decided to…

michael has been saving his money and wants to invest it. after doing some research, he has decided to invest $20,000 into a certificate of deposit. the interest rate on the cd is 3% with a term of five years, and the interest is paid out annually. based on recent inflation, michael is planning on an annual inflation rate of 2%. how much interest will michael earn on this cd in the first year, based on the real interest rate? $200 $600 $1,000 $1,400

michael has been saving his money and wants to invest it. after doing some research, he has decided to invest $20,000 into a certificate of deposit. the interest rate on the cd is 3% with a term of five years, and the interest is paid out annually. based on recent inflation, michael is planning on an annual inflation rate of 2%. how much interest will michael earn on this cd in the first year, based on the real interest rate? $200 $600 $1,000 $1,400

Answer

Explanation:

Step1: Identify the formula for real - interest calculation

The formula for simple interest is $I = P\times r$, where $P$ is the principal amount, $r$ is the real - interest rate. First, find the real - interest rate. The nominal interest rate $i = 3%=0.03$ and the inflation rate $\pi=2% = 0.02$. The real - interest rate $r$ is calculated using the Fisher equation $r=i-\pi$. So, $r = 0.03 - 0.02=0.01$.

Step2: Calculate the interest

The principal amount $P = 20000$. Using the simple - interest formula $I = P\times r$, we substitute $P = 20000$ and $r = 0.01$. So, $I=20000\times0.01 = 200$.

Answer:

$200$ (corresponding to the first option)