Practice

Free response question

Financial literacy · Hard · 30 marks

EO past paper: 2023 International Final

Mrs. Smith has the option to deposit her 10,000 euros into a time deposit account that offers an interest rate of 2% annually. For the purposes of this scenario, let's assume that there are no taxes on the interest earned.

(a)Doubling at 2% Interest: If Mrs. Smith chooses not to withdraw either her initial deposit or the accrued interest throughout the entire duration, how many years will it take for her deposit to double?[10](b)Doubling at 3% Interest: Should the interest rate be increased to 3% per year, what would be the corresponding timeframe required for the deposit to double?[10](c)Tripling with inflation consideration: Taking into account an annual inflation rate of 2% during the entire period, how many years will it take for the real purchasing power of Mrs. Smith's deposit to triple in the first case (i.e., at a 2% nominal interest rate) and the second case (i.e., at a 3% nominal interest rate)?[10]

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