Interest, inflation , and purchasing power Suppose Caroline is a sports fan and buys only baseball caps. Caroline deposits 2000 in a bank account that pays an annual nominal interest rate of 15%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit {comma} a baseball cap is priced at $20. Initially, the purchasing power of Caroline's 2000 deposit is baseball caps. For each of the annual inflationrates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation.then enter the corresponding purchasing of Caroline'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:Brown your answers in the first row down to the nearest baseball cap. For example, if you find that the deposit will cover 20.7 baseball caps, you would round to the purchasing power down to 20 baseball caps under the assumption that Caroline will not buy 7/10 of a baseball cap. Annual Inflation rate 0 % 15% 18% Number of caps Caroline can purchase after one year Real interest rate When the rate of inflation is equal to the interest rate on Caroline's deposit, the purchasing power of her deposit over the course of the year.
6. Interest, inflation , and
Suppose Caroline is a sports fan and buys only baseball caps. Caroline deposits 2000 in a bank account that pays an annual nominal interest rate of 15%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit {comma} a baseball cap is priced at $20.
Initially, the purchasing power of Caroline's 2000 deposit is baseball caps.
For each of the annual inflationrates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation.then enter the corresponding purchasing of Caroline'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:Brown your answers in the first row down to the nearest baseball cap. For example, if you find that the deposit will cover 20.7 baseball caps, you would round to the purchasing power down to 20 baseball caps under the assumption that Caroline will not buy 7/10 of a baseball cap.
Annual Inflation rate
0 %
15%
18%
Number of caps Caroline can purchase after one year
Real interest rate
When the rate of inflation is equal to the interest rate on Caroline's deposit, the purchasing power of her deposit over the course of the year.
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