5. Interest, inflation, and purchasing power Suppose Kate is a cinephile and buys only movie tickets. Kate deposits $1,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Kate's $1,000 deposit is | movie tickets. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Kate'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 movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Kate will not buy seven-tenths of a movie ticket. Annual Inflation Rate 0% 5% 10% Number of Tickets Kate Can Purchase after One Year % % % Real Interest Rate When the rate of inflation is greater than the interest rate on Kate's deposit, the purchasing power of her deposit over the course of the year.
5. Interest, inflation, and purchasing power Suppose Kate is a cinephile and buys only movie tickets. Kate deposits $1,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Kate's $1,000 deposit is | movie tickets. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Kate'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 movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Kate will not buy seven-tenths of a movie ticket. Annual Inflation Rate 0% 5% 10% Number of Tickets Kate Can Purchase after One Year % % % Real Interest Rate When the rate of inflation is greater than the interest rate on Kate's deposit, the purchasing power of her deposit over the course of the year.
Chapter1: Making Economics Decisions
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Kate is a cinephile and buys only movie tickets. Kate deposits $1,000 in a bank account that pays an annual nominal interest rate of 5%.
Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00.
Initially, the purchasing power of Kate's $1,000 deposit is
movie tickets.
For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Kate'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 movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets,
you would round the purchasing power down to 20 movie tickets under the assumption that Kate will not buy seven-tenths of a movie ticket.
Annual Inflation Rate
0%
5%
10%
Number of Tickets Kate Can Purchase after One Year
Real Interest Rate
%
When the rate of inflation is greater than the interest rate on Kate's deposit, the purchasing power of her deposit
over the
course of the year.
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