5. Interest, inflation, and purchasing power Suppose Diamond is a sports fan and buys only football tickets. Diamond deposits $2,000 into a savings account that pays an annual nominal interest rate of 20%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00. Initially, Diamond's $2,000 deposit has a purchasing power of 100 football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Diamond'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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Diamond will not buy seven-tenths of a football ticket. Number icke Diamond Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 20% 100 ▼ % % 23% When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit course of the year. over the
5. Interest, inflation, and purchasing power Suppose Diamond is a sports fan and buys only football tickets. Diamond deposits $2,000 into a savings account that pays an annual nominal interest rate of 20%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00. Initially, Diamond's $2,000 deposit has a purchasing power of 100 football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Diamond'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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Diamond will not buy seven-tenths of a football ticket. Number icke Diamond Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 20% 100 ▼ % % 23% When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit course of the year. over the
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: Money Growth And Intlation
Section: Chapter Questions
Problem 5PA
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Diamond is a sports fan and buys only football tickets. Diamond deposits $2,000 into a savings account that pays an annual nominal interest
rate of 20%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket
has a price of $20.00.
Initially, Diamond's $2,000 deposit has a purchasing power of
100 football tickets.
For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Diamond'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 football ticket. For example, if you find that the deposit will cover 20.7 football tickets,
you would round the purchasing power down to 20 football tickets under the assumption that Diamond will not buy seven-tenths of a football ticket.
Number of Tickets Diamond Can Purchase after One Year
Real Interest Rate
0%
100
Annual Inflation Rate
20%
%
%
23%
%
When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit
course of the year.
over the
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