Compound interest is important in keeping up with the rate of inflation.TrueFalse

Understanding the Statement

1. Definition of Compound Interest: Compound interest refers to the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. This means that the total amount grows at an increasing rate over time.

2. Inflation: Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.

Analysis

1. Relationship Between Compound Interest and Inflation:
   • Compound interest allows savings to grow at a rate that can potentially outpace inflation.
   • If the compound interest rate on savings is higher than the inflation rate, the real value of money increases.
   • Conversely, if inflation outpaces the compound interest rate, the purchasing power of money decreases.

Conclusion

Given that investing with compound interest can help protect savings against inflation by ensuring they grow at a sufficient rate, the statement is True.

This demonstrates the importance of compound interest in financial planning and wealth preservation amid rising prices.