5. Interest, inflation, and purchasing power Suppose Becky is a sports fan and buys only baseball caps. Becky deposits $2,000 in a bank account that pays an annual nominal interest rate of 15%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $20.00. Initially, the purchasing power of Becky's $2,000 deposit is baseball caps. For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Becky'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 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 Becky will not buy seven-tenths of a baseball cap. Annual Inflation Rate 0% 15% 18% Number of Caps Becky Can Purchase after One Year Real Interest Rate V over the When the rate of inflation is greater than the interest rate on Becky's deposit, the purchasing power of her deposit course of the year.
5. Interest, inflation, and purchasing power Suppose Becky is a sports fan and buys only baseball caps. Becky deposits $2,000 in a bank account that pays an annual nominal interest rate of 15%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $20.00. Initially, the purchasing power of Becky's $2,000 deposit is baseball caps. For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Becky'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 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 Becky will not buy seven-tenths of a baseball cap. Annual Inflation Rate 0% 15% 18% Number of Caps Becky Can Purchase after One Year Real Interest Rate V over the When the rate of inflation is greater than the interest rate on Becky's deposit, the purchasing power of her deposit course of the year.
Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations
Section: Chapter Questions
Problem 13P
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Becky is a sports fan and buys only baseball caps. Becky deposits $2,000 in a bank account that pays an annual nominal interest rate of
15%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $20.00.
Initially, the purchasing power of Becky's $2,000 deposit is
baseball caps.
For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of
SS
inflation. Then enter the corresponding purchasing power of Becky'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 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 Becky will not buy seven-tenths of a baseball cap.
Annual Inflation Rate
0%
15%
18%
Number of Caps Becky Can Purchase after One Year
Real Interest Rate
v over the
When the rate of inflation is greater than the interest rate on Becky's deposit, the purchasing power of her deposit
course of the year.
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