A deposit of $1,000 earns 10 percent a year, compounded annually. What is the balance after 2 years?

Correct answer to question 93 (Arithmetic Reasoning): $1,210

Method

The first year adds $100, bringing the balance to $1,100. The second year earns 10 percent of $1,100, which is $110, giving $1,210. Simple interest would have given $1,200, and the extra $10 is the interest earned on interest.