Answered: Suppose Dalia is a fan of young-adult…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations

Section: Chapter Questions

Problem 13P

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Interest, inflation, and purchasing power

Suppose Dalia is a fan of young-adult fiction and buys only young-adult books. Dalia 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 young-adult book has a price of $20.00.

Initially, Dalia's $2,000 deposit has a purchasing power of #????? young-adult books.

For each of the annual inflation rates given in the following table, first determine the new price of a young-adult book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dalia'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 young-adult book. For example, if you find that the deposit will cover 20.7 young-adult books, you would round the purchasing power down to 20 young-adult books under the assumption that Dalia will not buy seven-tenths of a young-adult book.

	Annual Inflation Rate
0%	20%	23%

Number of Books Dalia Can Purchase after One Year

0% = 90, 97, 100 or 120

20% = 90, 97, 100 or 120

23% = 90, 97, 100 or 120

Real Interest Rate

0% = ? ___%

20% = ? ___%

23% = ?____%

When the rate of inflation is less than the interest rate on Dalia's deposit, the purchasing power of her deposit FALLS, RISES or REMAINS THE SAME over the course of the year.

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