If inflation runs at 3% per annum over the next six years, what will be the purchasing power of €1,000 in six years' time, in terms of today’s purchasing power, using the supplied factors?

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Prepare for the QFA Investments Exam 1. Study with flashcards and multiple-choice questions with detailed explanations. Enhance your understanding and succeed on your exam!

Multiple Choice

If inflation runs at 3% per annum over the next six years, what will be the purchasing power of €1,000 in six years' time, in terms of today’s purchasing power, using the supplied factors?

Explanation:
Inflation reduces what money can buy over time, so to express a future amount in today’s terms you divide by the cumulative inflation factor. Each year multiplies the price level by 1.03, so over six years the factor is (1.03)^6 ≈ 1.194. The present purchasing power of €1,000 in six years is €1,000 divided by 1.194, which is about €837. This shows how much €1,000 in six years would be worth today in terms of buying power.

Inflation reduces what money can buy over time, so to express a future amount in today’s terms you divide by the cumulative inflation factor. Each year multiplies the price level by 1.03, so over six years the factor is (1.03)^6 ≈ 1.194. The present purchasing power of €1,000 in six years is €1,000 divided by 1.194, which is about €837. This shows how much €1,000 in six years would be worth today in terms of buying power.

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