Suppose Eileen is a cinephile and buys only movie tickets. Eileen deposits $2,00

Question

Suppose Eileen is a cinephile and buys only movie tickets. Eileen deposits $2,000 in a bank account that pays an annual interest rate of 20%. You can assume that this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Eileen's $2,000 deposit Is ______ movie tickets. The price of a movie ticket rises at the rate of inflation. For each of the annual inflation rates in the following table, select the corresponding purchasing power of Eileen's deposit after one year, and enter the value for the real interest Hint: Round your answers down to the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Eileen will not buy seven-tenths of a movie ticket. When the rate of inflation is less than the interest rate on Eileen's deposit, the purchasing power of her deposit ______ over the course of the year.

Explanation / Answer

2,000/10= 200 movie tickets. With a 20% interest rate, she has 1.20*2000= 2,400 after 1 year. At zero inflation rate, she can now buy 240 tickets and here real rate of return is 20%. At 20% inflation rate movie tickets cost $12 so she can only buy 2,400/12= 200 tickets (same as original) so her real interest rate is 0. At 25% inflation rate tickets cost $12.50. She can now only buy 2,400/12.50= 192 tickets. Her real interest rate is 192-200/200= - 4%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.