Suppose Megan is a sports fan and buys only baseball caps. Megan deposits $2,000

Question

Suppose Megan is a sports fan and buys only baseball caps. Megan 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 baseball cap costs $10.00. Initially, the purchasing power of Megan's $2,000 deposits baseball caps. The price of a baseball cap rises at the rate of inflation. For each of the annual inflation rates in the table below, select the corresponding purchasing power of Megan's deposit after one year and enter the value for the real interest rate. Hint: Round your answers down to the nearest baseball cap, For example, if you find that the deposit will cover 20.7 baseball caps, you would round the purchasing power down to 20 baseball caps under the assumption that Megan will not buy seven-tenths of a baseball cap. When the rate of inflation is less than, the interest rate on Megan's depose, the purchasing power of her deposit over the course of the year.

Explanation / Answer

1) 2,000/10= 200 caps 2)if inflation is 0% then prices will remain same, where money=(1+.2)* 2,000 2,400 no. of caps=240 caps Real int. rate= 20% { if inflation is 20% prices= (1+.2)*10= 12 money=2400(as in previous case) no. of caps= 200 real rate=(change in purchasing power/ purchasing power *100)=0% if inflation 1s 25% , new price= 12.5 new purchasing power or no. of caps=2400/12.5= 192 real rate of interest= -8/100*100= -8% 3)it increases

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