The amount of money, £P, in a savings account t years after 1st January 2011 is given by the formula #P = 6000 xx 1.05^t#. Does the account pay simple or compound interest. Explain how you know?

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Answer 1 · 2017-12-02T16:00:48

The account pays compound interest.

The whole of the previous amount is increased by #5%#

The account pays compound interest.

The clue is in the power of #t#

This would mean #6000 xx1.05xx1.05xx1.05xx....... t# times

#1.05 = 105/100 = 100% +5%#

So each time you multiply by #1.05# you are increasing the whole of the previous amount by #5%#

For example, if #t =5,# then #6000xx1.05^5# means

#color(blue)(6000 xx1.05)xx1.05xx1.05xx1.05xx1.05#

#=color(blue)(6300)xx1.05xx1.05xx1.05xx1.05#

#=6615xx1.05xx1.05xx1.05#

#=6945.75xx1.05xx1.05#

#=7293.0375 xx1.05#

#=7657.69#

Each line represents another increase by #5%#