5. Interest, inflation, and purchasing power Suppose Diamond is a fan of young-adult fiction and buys only young-adult books. Diamond deposits $2,000 into a savings account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a young-adult book has a price of $20.00. Initially, Diamond's $2,000 deposit has a purchasing power of young-adult books. For each of the annual inflation rates given in the following table, first determine the new price of a young-adult book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Diamond's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest young-adult book. For example, if you find that the deposit will cover 20.7 young-adult books, you would round the purchasing power down to 20 young-adult books under the assumption that Diamond will not buy seven-tenths of a young-adult book. Number of Books Diamond Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 10% % % 13% ▼ % When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit I over the
5. Interest, inflation, and purchasing power Suppose Diamond is a fan of young-adult fiction and buys only young-adult books. Diamond deposits $2,000 into a savings account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a young-adult book has a price of $20.00. Initially, Diamond's $2,000 deposit has a purchasing power of young-adult books. For each of the annual inflation rates given in the following table, first determine the new price of a young-adult book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Diamond's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest young-adult book. For example, if you find that the deposit will cover 20.7 young-adult books, you would round the purchasing power down to 20 young-adult books under the assumption that Diamond will not buy seven-tenths of a young-adult book. Number of Books Diamond Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 10% % % 13% ▼ % When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit I over the
Chapter1: Making Economics Decisions
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Diamond is a fan of young-adult fiction and buys only young-adult books. Diamond deposits $2,000 into a savings account that pays an
annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit,
suppose that a young-adult book has a price of $20.00.
Initially, Diamond's $2,000 deposit has a purchasing power of
young-adult books.
For each of the annual inflation rates given in the following table, first determine the new price of a young-adult book, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Diamond's deposit after one year in the first row of the table for each inflation rate.
Finally, enter the value for the real interest rate at each of the given inflation rates.
Hint: Round your answers in the first row down to the nearest young-adult book. For example, if you find that the deposit will cover 20.7 young-adult
books, you would round the purchasing power down to 20 young-adult books under the assumption that Diamond will not buy seven-tenths of a
young-adult book.
Number of Books Diamond Can Purchase after One Year
Real Interest Rate
0%
Annual Inflation Rate
10%
%
%
13%
%
When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit
course of the year.
over the
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