A savings deposit of $2,000 earns 5 percent interest compounded annually. What is the balance after 2 years?

Correct answer to question 196 (Arithmetic Reasoning): $2,205

Method

Each year's interest is calculated on the new balance, not the original amount. After year one the balance is 2,000 x 1.05 = $2,100, and after year two it is 2,100 x 1.05 = $2,205.