5. Interest, inflation, and purchasing power Suppose Diamond is a sports fan and buys only football tickets. Diamond deposits $4,000 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 football ticket has a price of $20.00. Initially, Diamond's $4,000 deposit has a purchasing power of football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, 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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Diamond will not buy seven-tenths of a football ticket. Annual Inflation Rate 10% 0% 13%

5. Interest, inflation, and purchasing power Suppose Diamond is a sports fan and buys only football tickets. Diamond deposits $4,000 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 football ticket has a price of $20.00. Initially, Diamond's $4,000 deposit has a purchasing power of football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, 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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Diamond will not buy seven-tenths of a football ticket. Annual Inflation Rate 10% 0% 13%

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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I need help in solving this problem.
Currently brokers in the Edmonton area are offering variable rate mortgages for 1.5% or less. Assume that the Bank of Canada is able to hit the midpoint of its target range for inflation. Calculate the real interest rate on a mortgage at 1.5%. How would you interpret the results of your calculation and what would be the effect on house prices in the Edmonton area