Question #5

John works at a financial institution in the United States and his job profile makes him interact with the various components of the nations financial system. He is of the view that a nations citizenry is better-off when everyone is self-sufficient and no one needs to borrow from or lend to someone to succeed in their respective ventures. In fact, he comes from a family background that considers borrowing to be an embarrassment. To be debt-free is what he sees as an important pillar of financial success.

Johns younger brother calls in just before lunch. He is really excited about a new smartphone that he wants to buy and show it off to his friends at the University. He has been saving for some time and has accumulated $300. His grandfather has also contributed $550 in the kitty. He is asking John for some help as the new phone costs $900. But you know our friend John He is sceptical as usual and tells his brother, You know that the value of smartphones falls with time. Trust me, by the same time next year, the phone will be 5% cheaper. You would have seen its customer reviews as well. By the way, the name of Johns brother is Shaun and he boasts a special combination, which is that of vigorous youth combined with a calm head on his shoulders. He takes his big brothers advice seriously and decides to deposit his savings along with what his grandfathers contribution in a 1-year deposit account which offers a real interest rate of 0.15% p.a. The expected inflation rate is 0.8% p.a. He hopes to be able to afford the phone when the deposit matures. Thanking John for his sensible advice, he disconnects the call, leaving John to proceed for lunch.

Question 5 (5 marks) Will Shaun be able to buy his desired smartphone next year? Support your answer with relevant computations. (5 marks)