5. Interest, inflation, and purchasing power Suppose Damaris is a sports fan and buys only football tickets. Damaris deposits $4,000 into a savings account that pays an annual nominal interest rate of 10%. 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, Damaris's $4,000 deposit has a purchasing power of 200 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 Damaris'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 Damaris will not buy seven-tenths of a football ticket. Number of Tickets Damaris Can Purchase after One Year Real Interest Rate 0% 220 Annual Inflation Rate 10% 10% 200 Imm 0% 13% 194 -3% When the rate of inflation is greater than the interest rate on Damaris's deposit, the purchasing power of her deposit the course of the year. falls over
5. Interest, inflation, and purchasing power Suppose Damaris is a sports fan and buys only football tickets. Damaris deposits $4,000 into a savings account that pays an annual nominal interest rate of 10%. 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, Damaris's $4,000 deposit has a purchasing power of 200 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 Damaris'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 Damaris will not buy seven-tenths of a football ticket. Number of Tickets Damaris Can Purchase after One Year Real Interest Rate 0% 220 Annual Inflation Rate 10% 10% 200 Imm 0% 13% 194 -3% When the rate of inflation is greater than the interest rate on Damaris's deposit, the purchasing power of her deposit the course of the year. falls over
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:5. Interest, inflation, and purchasing power
Suppose Damaris is a sports fan and buys only football tickets. Damaris deposits $4,000 into a savings account that pays an annual nominal interest
rate of 10%. 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, Damaris's $4,000 deposit has a purchasing power of 200 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 Damaris'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 Damaris will not buy seven-tenths of a football ticket.
Number of Tickets Damaris Can Purchase after One Year
Real Interest Rate
0%
220
Annual Inflation Rate
10%
10%
200
Imm
0%
13%
194
-3%
When the rate of inflation is greater than the interest rate on Damaris's deposit, the purchasing power of her deposit
the course of the year.
falls
over
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