How does compounding affect the total interest earned on an investment over two years compared to simple interest?

Compounding increases the total interest earned on an investment over two years compared to simple interest. For example, an investment of $325 at a 14% interest rate earns $45.50 in interest each year with simple interest, totaling $91 over two years. However, with compounding, the total interest earned is $97.37, which includes an additional $6.37 from interest on interest.

In the example provided, an investment of $325 at a 14% interest rate results in $45.50 earned in interest each year under simple interest, leading to a total of $91 after two years. In contrast, when compounding is applied, the total amount after two years is $422.37, resulting in a total interest of $97.37. This includes $6.37 earned from the interest on the interest from the first year, demonstrating how compounding can significantly enhance the total interest earned compared to simple interest.