Suppose Neha is a sports fan and buys only baseball caps. Neha deposits $3,000 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 Neha's $3,000 deposit is$______________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 Neha'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 Neha will not buy seven-tenths of a baseball cap.
Suppose Neha is a sports fan and buys only baseball caps. Neha deposits $3,000 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 Neha's $3,000 deposit is$______________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 Neha'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 Neha will not buy seven-tenths of a baseball cap.
Chapter17: Capital And Time
Section: Chapter Questions
Problem 17.7P
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Question
Suppose Neha is a sports fan and buys only baseball caps.
Neha deposits $3,000 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 Neha's $3,000 deposit is$______________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 Neha'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 Neha will not buy seven-tenths of a baseball cap.
|
|
|
Annual Inflation Rate
|
||
|---|---|---|---|---|
|
0%
|
5%
|
8%
|
||
| Number of Caps Neha Can Purchase after One Year | (150,305,315,582) | (150,300,305,582) | (150,291,305,582) | |
| Real Interest Rate |
%
|
%
|
%
|
|
When the rate of inflation is equal to the interest rate on Neha's deposit, the purchasing power of her deposit (rise, fall, remains the same) over the course of the year.
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