Suppose Frances is an avid reader and buys only mystery novels. Frances deposits $2,000 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, a mystery novel is priced at $20.00. Initially, the purchasing power of Frances's $2,000 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 Frances'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 Frances will not buy seven-tenths of a mystery novel. Annual Inflation Rate 0% 15% 18% Number of Novels Frances Can Purchase after One Year Real Tnteres

Suppose Frances is an avid reader and buys only mystery novels. Frances deposits $2,000 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, a mystery novel is priced at $20.00. Initially, the purchasing power of Frances's $2,000 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 Frances'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 Frances will not buy seven-tenths of a mystery novel. Annual Inflation Rate 0% 15% 18% Number of Novels Frances Can Purchase after One Year Real Tnteres

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Task 5: Suppose, in the base year, a typical market basket purchased by an urban family cost $250. In Year 1, the same market basket cost $950. What is the consumer price index (CPI) for Year 1? If the same market basket cost $1000 in Year 2, what is the CPI for year 2? Calculate the rate of inflation between year 1 and year 2. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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