7. Interest, inflation, and purchasing power Suppose Susan is an avid reader and buys only comic books. Susan 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 comic book is priced at $10.00. Initially, the purchasing power of Susan's $1,000 deposit is 100 comic books. For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Susan'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 comic book. For example, if you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assumption that Susan will not buy seven-tenths of a comic book. Annual Inflation Rate 0% 5% 10% Number of Comics Susan Can Purchase after One Year 105 Real Interest Rate % When the rate of inflation is equal to the interest rate on Susan's deposit, the purchasing power of her deposit over the course of the year.
7. Interest, inflation, and purchasing power Suppose Susan is an avid reader and buys only comic books. Susan 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 comic book is priced at $10.00. Initially, the purchasing power of Susan's $1,000 deposit is 100 comic books. For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Susan'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 comic book. For example, if you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assumption that Susan will not buy seven-tenths of a comic book. Annual Inflation Rate 0% 5% 10% Number of Comics Susan Can Purchase after One Year 105 Real Interest Rate % When the rate of inflation is equal to the interest rate on Susan's deposit, the purchasing power of her deposit over the course of the year.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:7. Interest, inflation, and purchasing power
Suppose Susan is an avid reader and buys only comic books. Susan 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 comic book is priced at $10.00.
Initially, the purchasing power of Susan's $1,000 deposit is
100 comic books.
For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Susan'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 comic book. For example, if you find that the deposit will cover 20.7 comic books, you
would round the purchasing power down to 20 comic books under the assumption that Susan will not buy seven-tenths of a comic book.
Annual Inflation Rate
10%
Number of Comics Susan Can Purchase after One Year
105
Real Interest Rate
%
%
When the rate of inflation is equal to the interest rate on Susan's deposit, the purchasing power of her deposit
over the
course of the year.
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