Suppose Megan is an avid reader and buys only mystery novels. Megan deposits $3,

Question

Suppose Megan is an avid reader and buys only mystery novels. Megan deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%.

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 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 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 Megan will not buy seven-tenths of a mystery novel.

When the rate of inflation is less than the interest rate on Megan's deposit, the purchasing power of her deposit course of the year. over the

Explanation / Answer

Answer to blank 1: rise

Number of novels can not be determined, because the price of novel is not given in question.

Real Interest Rate = Nominal Interest Rate - Inflation rate

Annual Inflation Rate 0% 10% 13% Real Interest Rate 10% 0% -3%

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