Attempts Average / 3 5. Interest, inflation, and purchasing power Suppose Alyssa is a sports fan and buys only baseball caps. Alyssa deposits $4,000 in a bank account that pays an annual nominal interest rate of 5%. 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 $10.00. Initially, the purchasing power of Alyssa's $4,000 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 Alyssa'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 Alyssa will not buy seven-tenths of a baseball cap. Annual Inflation Rate 0% 5% 8% Number of Caps Alyssa Can Purchase after One Year Real Interest Rate When the rate of inflation is equal to the interest rate on Alyssa's deposit, the purchasing power of her deposit over the course of the year.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 37P: Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time...

See similar textbooks

Related questions

Question

0% drop down: 200/ 390/ 420/ 776

5% drop down 200/ 390/ 400/ 776

8% drop down 200/ 388/ 390/ 776

last down rises/ remains the same/ falls

Attempts
Average / 3
5. Interest, inflation, and purchasing power
Suppose Alyssa is a sports fan and buys only baseball caps. Alyssa deposits $4,000 in a bank account that pays an annual nominal interest rate of
5%. 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 $10.00.
Initially, the purchasing power of Alyssa's $4,000 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 Alyssa'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 Alyssa will not buy seven-tenths of a baseball cap.
Annual Inflation Rate
0%
5%
8%
Number of Caps Alyssa Can Purchase after One Year
Real Interest Rate
%
When the rate of inflation is equal to the interest rate on Alyssa's deposit, the purchasing power of her deposit
over the
course of the year.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.