Suppose Dariya is a sports fan and buys only football tickets. Dariya deposits $2,000 into a savings account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00. Initially, Dariya's $2,000 deposit has a purchasing power of football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dariya'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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Dariya will not buy seven-tenths of a football ticket. Number of Tickets Dariya Can Purchase after One Year Real Interest Rate Annual Inflation Rate 10% 0% % % 13% % When the rate of inflation is greater than the interest rate on Dariya's deposit, the purchasing power of her deposit ▶ over
Suppose Dariya is a sports fan and buys only football tickets. Dariya deposits $2,000 into a savings account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00. Initially, Dariya's $2,000 deposit has a purchasing power of football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dariya'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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Dariya will not buy seven-tenths of a football ticket. Number of Tickets Dariya Can Purchase after One Year Real Interest Rate Annual Inflation Rate 10% 0% % % 13% % When the rate of inflation is greater than the interest rate on Dariya's deposit, the purchasing power of her deposit ▶ over
Chapter1: Making Economics Decisions
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Dariya is a sports fan and buys only football tickets. Dariya deposits $2,000 into a savings account that pays an annual nominal interest
rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket
has a price of $20.00.
Initially, Dariya's $2,000 deposit has a purchasing power of
football tickets.
For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Dariya'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 football ticket. For example, if you find that the deposit will cover 20.7 football
tickets, you would round the purchasing power down to 20 football tickets under the assumption that Dariya will not buy seven-tenths of a football
ticket.
Number of Tickets Dariya Can Purchase after One Year
Real Interest Rate
Annual Inflation Rate
10%
0%
%
%
13%
%
When the rate of inflation is greater than the interest rate on Dariya's deposit, the purchasing power of her deposit
the course of the year.
over
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