Suppose Rosa is an avid reader and buys only mystery novels. Rosa deposits $1,000 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. Initially, the purchasing power of Rosa's $1,000 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 Rosa'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 mvstery novels under the assumption that Rosa will not buy seven-tenths of a mystery novel. Annual Inflation Rate 0% 5% 10% remains the same Number of Novels Rosa Can Purchase after One Year rises Real Interest Rate falls When the rate of inflation is less than the Interest rate on Rosa's deposit the purchasing power of her deposit over the course of the year.
Suppose Rosa is an avid reader and buys only mystery novels. Rosa deposits $1,000 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. Initially, the purchasing power of Rosa's $1,000 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 Rosa'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 mvstery novels under the assumption that Rosa will not buy seven-tenths of a mystery novel. Annual Inflation Rate 0% 5% 10% remains the same Number of Novels Rosa Can Purchase after One Year rises Real Interest Rate falls When the rate of inflation is less than the Interest rate on Rosa's deposit the purchasing power of her deposit over the course of the year.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Rosa is an avid reader and buys only mystery novels. Rosa deposits $1,000 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.
Initially, the purchasing power of Rosa's $1,000 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 Rosa'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 Rosa will not buy seven-tenths of a mystery
novel.
Annual Inflation Rate
remains the same
0%
5%
10%
Number of Novels Rosa Can Purchase after One Year
rises
Real Interest Rate
falls
When the rate of inflation is less than the interest rate on Rosa's deposit, the purchasing power of her deposit
over the
course of the year.
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