Annual Inflation Rate 0% 10% 13% umber of Novels Alyssa Can Purchase after One Year eal Interest Rate % % % en the rate of inflation is less than the interest rate on Alyssa's deposit, the purchasing power of her deposit over the rse of the year.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Suppose Alyssa is an avid reader and buys only mystery novels. Alyssa deposits $4,000 in a bank account that pays an annual nominal interest rate of
10%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a mystery novel is priced at $20.00.
Initially, the purchasing power of Alyssa's $4,000 deposit is
mystery novels.
For each of the annual inflation rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Alyssa'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 mystery novel. For example, if you find that the deposit will cover 20.7 mystery
novels, you would round the purchasing power down to 20 mystery novels under the assumption that Alyssa will not buy seven-tenths of a mystery
novel.
Annual Inflation Rate
0%
10%
13%
Number of Novels Alyssa Can Purchase after One Year
Real Interest Rate
%
%
%
When the rate of inflation is less than the interest rate on Alyssa's deposit, the purchasing power of her deposit
over the
course of the year.
Transcribed Image Text:Suppose Alyssa is an avid reader and buys only mystery novels. Alyssa deposits $4,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a mystery novel is priced at $20.00. Initially, the purchasing power of Alyssa's $4,000 deposit is mystery novels. For each of the annual inflation rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Alyssa'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 mystery novel. For example, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery novels under the assumption that Alyssa will not buy seven-tenths of a mystery novel. Annual Inflation Rate 0% 10% 13% Number of Novels Alyssa Can Purchase after One Year Real Interest Rate % % % When the rate of inflation is less than the interest rate on Alyssa's deposit, the purchasing power of her deposit over the course of the year.
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