Suppose Ginny is an avid reader and buys only mystery novels. Ginny deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. 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 $10.00. (i.) Initially, the purchasing power of Ginny's $3,000 deposit is------ mystery novels. (i.) For each of the following annual inflation rates (0%, 5% and 8%), first determine the new price of a mystery novel, assuming it rises at the rate of inflation. Then determine the corresponding purchasing power of Ginny's deposit after one year for each inflation rate. Finally, calculate the value for the real interest rate at each of the given inflation rates. Hint: Round your answers 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 Ginny will not buy seven-tenths of a mystery novel. (iii.) When the rate of inflation is equal to the interest rate on Ginny's deposit, the purchasing power of her deposit-----over the course of the year: (a) rises; (b) falls; (c) remains the same.
Suppose Ginny is an avid reader and buys only mystery novels. Ginny deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. 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 $10.00. (i.) Initially, the purchasing power of Ginny's $3,000 deposit is------ mystery novels. (i.) For each of the following annual inflation rates (0%, 5% and 8%), first determine the new price of a mystery novel, assuming it rises at the rate of inflation. Then determine the corresponding purchasing power of Ginny's deposit after one year for each inflation rate. Finally, calculate the value for the real interest rate at each of the given inflation rates. Hint: Round your answers 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 Ginny will not buy seven-tenths of a mystery novel. (iii.) When the rate of inflation is equal to the interest rate on Ginny's deposit, the purchasing power of her deposit-----over the course of the year: (a) rises; (b) falls; (c) remains the same.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Suppose Ginny is an avid reader and buys only mystery novels. Ginny
deposits $3,000 in a bank account that pays an annual nominal interest
rate of 5%. 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
$10.00.
(i.) Initially, the purchasing power of Ginny's $3,000 deposit is------
mystery novels.
(i.) For each of the following annual inflation rates (0%, 5% and 8%),
first determine the new price of a mystery novel, assuming it rises at
the rate of inflation. Then determine the corresponding purchasing
power of Ginny's deposit after one year for each inflation rate. Finally,
calculate the value for the real interest rate at each of the given
inflation rates.
Hint: Round your answers 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 Ginny will not buy seven-tenths of a mystery novel.
(iii.) When the rate of inflation is equal to the interest rate on Ginny's
deposit, the purchasing power of her deposit-----over the course of the
year:
(a) rises;
(b) falls;
(c) remains the same.
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