P1 Nominal and real rates. Tyra loves to shop at her favorite store, Dollar Barrel, where she can findhundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree atDollar Barrel, but she is also thinking of investing her money.a. Suppose the expected rate of inflation is 1% (so next year, everything at Dollar Barrel will cost $1.01) andb. Now suppose that the expected inflation rate is 10% and Tyra can earn 20% on money that she invests overthe year. What is the approximate real rate of interest that Tyra will earn? Calculate the number of itemsthat Tyra could buy next year from Dollar Barrel if she invests her money. What is the percentage increasein her purchasing power if she waits a year to go shopping?Answer fill in the blue bozes below.a. 1.) Approximately what real rate of interest could Tyra earn if she invests her money?Nominal interest rateExpected inflationApproximate real rate2.) How many items can she buy at Dollar Barrel today, and how many can she buy a year from now if she$200$15%17.Money todayCost per item todayItems buy todayMoney in one yearCost per item in one yearItems buy in one year3.) What is the percentage increase in Tyra's purchasing power if she waits a year to go shopping?Items buy todayItems buy in one yearChange in purchasing po200207.92 3.) What is the percentage increase in Tyra's purchasing power if she waits a year to go shopping?Items buy todayItems buy in one yearChange in purchasing poCompare your answer to the approximate real interest rate on Tyra's investment.The actual change in purchasing power is nearly the same as the approximate real interest rate.b. 1.) What is the approximate real rate of interest that Tyra will earn?Nominal interest rateExpected inflation200207.92Money in one yearCost per item in one yearItems buy in one year20%10%Approximate real rate2.) Calculate the number of items that Tyra could buy next year from Dollar Barrel if she invests herMoney today$200$1Cost per item todayItems buy today3.) What is the percentage increase in her purchasing power if she waits a year to go shopping?Items buy todayItems buy in one yearChange in purchasing po200218.18

Money is available today to spend=$200 Expected inflation=1% Real interest rate is the…

P1 Nominal and real rates. Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money. a. Suppose the expected rate of inflation is 17. (so next year, everything at Dollar Barrel will cost $1.01) and b. Now suppose that the expected inflation rate is 10% and Tyra can earn 20% on money that she invests over the year. What is the approximate real rate of interest that Tyra will earn? Calculate the number of items that Tyra could buy next year from Dollar Barrel if she invests her money. What is the percentage increase in her purchasing power if she waits a year to go shopping?

P1 Nominal and real rates. Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money. a. Suppose the expected rate of inflation is 17. (so next year, everything at Dollar Barrel will cost $1.01) and b. Now suppose that the expected inflation rate is 10% and Tyra can earn 20% on money that she invests over the year. What is the approximate real rate of interest that Tyra will earn? Calculate the number of items that Tyra could buy next year from Dollar Barrel if she invests her money. What is the percentage increase in her purchasing power if she waits a year to go shopping?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations

Section: Chapter Questions

Problem 13P

See similar textbooks

Related questions

Q: 5. Calculate the one-year real rate of interest faced by the U.S. government given that expected…

A: Nominal interest rate is the interest rate charges before calculating the inflation rate into…

Q: Suppose you'll have an annual nominal income of $40,000 for each of the next three years, and the…

A: real income = Nominal Income / Price level Growth in real income = Growth in nominal income -…

Q: 3. The rate of inflation as of Thursday is 6 %, this is expected to continue. Sylvia wants to earn a…

A: Given Rate of inflation =6% We know that the real rate of interest = nominal interest rate minus the…

Q: 12. Suppose the inflation rate of a country in 2009 was 13%. If a dress cost $125 at the beginning…

A: Inflation is the general rise in the prices of goods and services in a country in a financial year.…

Q: There is a persistent fear that there will be a high level of deflation. Many economists arn that…

A: The Herb is in debt and has to pay a 5.50% nominal interest rate, expected inflation is to be 3.00%…

Q: Inflation and interest rates a) Define/explain the consumer price index. b) Suppose that the nominal…

A: Note: Since, you've posted question with multiple sub-parts, we will solve the first the first three…

Q: The total price of purchasing a basket of goods in the United Kingdom over four years is: year…

A: Inflation is the rate at which prices rise over a given time period. Inflation is typically defined…

Q: Suppose Rosa is an avid reader and buys only mystery novels. Rosa deposits $1,000 in a bank account…

A: The real interest rate is the rate of interest an investor receives after allowing for inflation.

Q: Suppose Rina is an avid reader and buys only mystery novels. Rina deposits $3,000 in a bank account…

A: Inflation refers to the sustained increase in the general price level of goods and services in an…

Q: 2. Compute inflation rates for the following cases. a. Calculate the one-period inflation rate for…

Q: Suppose there are 1200 units of money on an island, but money grows by 5.32% per year. Islanders…

A: GDP or gross domestic product is the sum of the value of all end commodities produced within the…

Q: 5. Who in an economy is the big winner from inflation and why?

A: Inflation refers to the general rise in the prices in an economy. Most modern economies expect to…

Q: The rate of inflation as of Thursday is 6 %, this is expected to continue. Sylvia wants to earn a…

A: When determining the performance of an investment, the nominal rate of return excludes taxes and…

Q: Suppose you take out a multi-year loan from a bank with an intrest rate of 5%. a. The rate you are…

A: Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: Suppose Julie's salary went from $45,000 to 13. $175,000 in 12 years. a. Assuming she got the same…

A: Given, PV = $45000 FV = $175,000 n =12Inflation rate=3%

Q: In Year 1 the CPI was 100; 20 years later, it was 229. What was the annual rate of inflation? Round…

A: [Since more than 1 question are posted, only 1st question can be answered, as per answering policy]…

Q: Suppose Devon is a fan of young-adult fiction and buys only young-adult books. Devon deposits $2,000…

A: Inflation is when the prices of products and services keep rising over a certain period. It results…

Q: Suppose Dalia is a fan of young-adult fiction and buys only young-adult books. Dalia deposits $2,000…

A: Purchasing power is a measure of the value of money, taking into account changes in the prices of…

Q: 13. How does inflation affect people's standards of living and savings? Inflation is an (increase,…

A: Inflation refers to the overall increase in the prices of goods and services which affects the…

Q: Suppose that the nominal interst rate is 7 percent and the real interest rate is 5 percent.…

A: A part of prevailing interest rate is known as the inflation premium. The inflation premium can be…

Q: Suppose the economy’s nominal GDP constantly grows at 9%, and real GDP constantly grows at 4% What…

A: Real GDP refers to the actual productivity that the economy can produce after excluding various…

Q: Suppose that at the start of 1999, Ari invests their money in a savings account earning 3.6%…

A: Real interest rate = Nominal interest rate-rate of inflation

Q: Using you answer for Question 2, what will be the price per MMBtu of natural gas on June 30, 2022 if…

A: The price per MMBtu can be calculated by using the following equation. Price per MMBtu= Pi*(1+i)t

Q: The price level was 118.3 in 1988, 124.0 in 1989, and 130.7 in 1990. What were the rates of…

A: The inflation rate shows the persistence increment in the price level in the economy. The inflation…

Q: Suppose you'll have an annual nominal income of $20,000 for each of the next three years, and the…

A: InflationInflation is an event when average prices in the economy raises, it wastes the value of…

Q: 4. In which of these situations is the A) The nominal interest rate is 3% and the inflation rate is…

A: The relationship between real interest rate, inflation rate and nominal interest rate is : Nominal…

Q: Suppose the bank give you a loan at 4.46% interest rate but the economy experiences inflation of…

A: The relationship between inflation and inflation is given by the Irving fisher where interest rate…

Question

100%

P1 Nominal and real rates. Tyra loves to shop at her favorite store, Dollar Barrel, where she can find
hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at
Dollar Barrel, but she is also thinking of investing her money.
a. Suppose the expected rate of inflation is 1% (so next year, everything at Dollar Barrel will cost $1.01) and
b. Now suppose that the expected inflation rate is 10% and Tyra can earn 20% on money that she invests over
the year. What is the approximate real rate of interest that Tyra will earn? Calculate the number of items
that Tyra could buy next year from Dollar Barrel if she invests her money. What is the percentage increase
in her purchasing power if she waits a year to go shopping?
Answer fill in the blue bozes below.
a. 1.) Approximately what real rate of interest could Tyra earn if she invests her money?
Nominal interest rate
Expected inflation
Approximate real rate
2.) How many items can she buy at Dollar Barrel today, and how many can she buy a year from now if she
$200
$1
5%
17.
Money today
Cost per item today
Items buy today
Money in one year
Cost per item in one year
Items buy in one year
3.) What is the percentage increase in Tyra's purchasing power if she waits a year to go shopping?
Items buy today
Items buy in one year
Change in purchasing po
200
207.92

3.) What is the percentage increase in Tyra's purchasing power if she waits a year to go shopping?
Items buy today
Items buy in one year
Change in purchasing po
Compare your answer to the approximate real interest rate on Tyra's investment.
The actual change in purchasing power is nearly the same as the approximate real interest rate.
b. 1.) What is the approximate real rate of interest that Tyra will earn?
Nominal interest rate
Expected inflation
200
207.92
Money in one year
Cost per item in one year
Items buy in one year
20%
10%
Approximate real rate
2.) Calculate the number of items that Tyra could buy next year from Dollar Barrel if she invests her
Money today
$200
$1
Cost per item today
Items buy today
3.) What is the percentage increase in her purchasing power if she waits a year to go shopping?
Items buy today
Items buy in one year
Change in purchasing po
200
218.18

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Given information

Step 2: Part a)

Step 3: Part b)

Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

The index number representing the price level changes from 110 to 115 in one year and then from 115 to 120 the next year. Since the index number increases by five each year, is five inflation rate each year? Is the inflation rate the same each year? Explain your answer.
Inflation rates, like most statistics, are imperfect measures. Can you identify some ways that the inflation rate for fruit does not perfectly capture the rising price of fruit?
Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of 20,000. However, if the inflation rate is 6 per year, how much buying power will that 20,000 have when measured in todays dollars? Hint: Start by calculating the rise in the price level over the 16 years.
Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate man using the GDP deflate:
If, over time, wages and salaries on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3, what would likely happen to a homeowner with an adjustable-rate mortgage?
Given the federal budget deficit in recent years, some economists have argued mat by adjusting Social Security payments for inflation using me CPI, Social Security is warming recipients. What is their argument, and do you agree or disagree with it?
Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.
What is the difference between the price level and the tale of inflation?
There is a persistent fear that there will be a high level of deflation. Many economists arn that it may be worse for the economy than if there is high inflation. Suppose that Herb is in debt and has to pay a 5.50% nominal interest rate. He expected inflatin to be 3.00%. Instead, inflation is -2.00% deflation. What is the real interest rate that Herb expected to pay? What is the real interest rate that Herb is actually paying? Because the economy is experiencing deflation of -2.00% nstead of inflation of 3.00%. Herb's real interest rate, compared t what he expected to pay, has A. decreased, so Herb feels poorer. B. decreased, so Herb feels richer. C. increased, so Herb feels richer. D. increased, so Herb feels poorer.
. The rate of inflation as of Thursday is 6 %, this is expected to continue. Sylvia wants to earn a real rate of return of 10% on her money. The bank is offering her 14% for deposits. a. should Sylvia accept this rate? Why or why not? b. If Sylvia expects this inflation rate to decrease to 3%, would your answer in "a" change?
2. Compute inflation rates for the following cases. a. Calculate the one-period inflation rate for the US in 2022 given that the CPI in 2021 was 271.0 and the CPI in 2022 was 292.7. b. Using the CPI data table from question 1, calculate the average annual inflation rate from 1970 to 1990. (Hint- this will use the constant growth formula from Lecture 3). c. Using the CPI data table from question 1, calculate the average annual inflation rate from 2000 to 2020. (Hint- this will use the constant growth formula from Lecture 3).