Attempts: Average: /3 5. Interest, inflation, and purchasing power Suppose Debor

Question

Attempts: Average: /3 5. Interest, inflation, and purchasing power Suppose Deborah is an avid reader and buys only mystery novels. Deborah 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 i, priced at S 10.00. Initially, the purchasing power of Deborah's $3,000 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 Deborah's deposit after one year in the first row of the table for each infiation 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 Deborah will not buy seven-tenths of a mystery novel Annual Inflation Rate 0% s% 8% Number of Novels Deborah Can Purchase after One Year Real Interest Rate When the rate of inflation is greater than the interest rate on Deborah's deposit, the purchasing power of her deposit the course of the year over Grade It Now Save & Continue Continue without saving

Explanation / Answer

a) $300

Purchasing power of Deborah = 3000 / 10 = 300

b) at annual inflation rate 0% = Deborah deposit become after one year = 3000 + ( 3000*0.05) = 3150

number of nover Deborah purchase = 3150 / 10 = 315

real interest rate = Nominal interest rate - inflation rate

real interest rate = 5 - 0 = 5%

at inflation rate = 5% = debroah deposit become after one year = 3000

number of novel Deborah purchase = 3000 /10 = 300

real interest rate = 5% - 5% = 0%

at inflation rate 8%= deborah deposit become after one year = 3000 - ( 3000*0.03) = 2910

number of nover Deborah purchase = 2910 / 10 = 291

real interest rate = 5% - 8% = -3%

c) Decreases.

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