Suppose Devon is a fashionista and buys only denim jackets. Devon deposits $4,000 into a savings account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a denim jacket has a price of $10.00. Initially, Devon's $4,000 deposit has a purchasing power of denim jackets. For each of the annual inflation rates given in the following table, first determine the new price of a denim jacket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Devon'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 denim jacket. For example, if you find that the deposit will cover 20.7 denim jackets, you would round the purchasing power down to 20 denim jackets under the assumption that Devon will not buy seven-tenths of a denim jacket. Number of Jackets Devon Can Purchase after One Year Real Interest Rate Annual Inflation Rate 5% 0% % 8% % When the rate of inflation is equal to the interest rate on Devon's deposit, the purchasing power of her deposit course of the year. over the
Suppose Devon is a fashionista and buys only denim jackets. Devon deposits $4,000 into a savings account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a denim jacket has a price of $10.00. Initially, Devon's $4,000 deposit has a purchasing power of denim jackets. For each of the annual inflation rates given in the following table, first determine the new price of a denim jacket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Devon'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 denim jacket. For example, if you find that the deposit will cover 20.7 denim jackets, you would round the purchasing power down to 20 denim jackets under the assumption that Devon will not buy seven-tenths of a denim jacket. Number of Jackets Devon Can Purchase after One Year Real Interest Rate Annual Inflation Rate 5% 0% % 8% % When the rate of inflation is equal to the interest rate on Devon's deposit, the purchasing power of her deposit course of the year. over the
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose Devon is a fashionista and buys only denim jackets. Devon deposits $4,000 into a savings account that pays an annual nominal interest rate
of 5%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a denim jacket has a
price of $10.00.
Initially, Devon's $4,000 deposit has a purchasing power of
denim jackets.
For each of the annual inflation rates given in the following table, first determine the new price of a denim jacket, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Devon'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 denim jacket. For example, if you find that the deposit will cover 20.7 denim jackets,
you would round the purchasing power down to 20 denim jackets under the assumption that Devon will not buy seven-tenths of a denim jacket.
Number of Jackets Devon Can Purchase after One Year
Real Interest Rate
Annual Inflation Rate
5%
0%
%
8%
%
When the rate of inflation is equal to the interest rate on Devon's deposit, the purchasing power of her deposit
course of the year.
over the
Expert Solution
Step 1
The purchasing power of deposits increases after a year when interest rate is earned on the deposits.
Future value of deposits with 5% interest= 4000(1+0.05)
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