Suppose Megan is an avid reader and buys only comic books. Megan deposits $4,000
ID: 1141789 • Letter: S
Question
Suppose Megan is an avid reader and buys only comic books. Megan deposits $4,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a comic book is priced at $20.00. Initially, the purchasing power of Megan's $4,000 deposit is comic books. For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Megan'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 comic book. For example, if you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assumption that Megan will not buy seven-tenths of a comic book. Annual Inflation Rate 0% 10% 13% Number of Comics Megan Can Purchase after One Year Real Interest Rate % % % When the rate of inflation is greater than the interest rate on Megan's deposit, the purchasing power of her deposit
Explanation / Answer
Initially, the purchasing power of Megan's $4,000 deposit is = 4000/20 = 200 comic books
Price (after 1 year) = 20 x (1 + inflation rate)
Real interest rate = Nominal interest rate - inflation rate
Books purchased = Amount in deposit after 1 year/ price after 1 year
When the rate of inflation is greater than the interest rate on Megan's deposit, the purchasing power of her deposit decreases.
Annual inflation rate 0% 10% 13% Price ($) after a year 20 22 22.6 Books purchased 220 200 194 Real interest rate 10.0% 0.0% -3.0%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.