5. Interest, inflation, and purchasing power Suppose Devon is a sports fan and buys only football tickets. Devon deposits $4,000 into a savings account that pays an annual nominal interest rate of 5%. 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 $10.00. Initially, Devon's $4,000 deposit has a purchasing power of 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 Devon'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 Devon will not buy seven-tenths of a football ticket. Annual Inflation Rate 0% 5% 8% Number of Tickets Devon Can Purchase after One Year 400 Real Interest Rate % % % When the rate of inflation is greater than the interest rate on Devon's deposit, the purchasing power of her deposit. course of the year. over the

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter7: Unemployment And Inflation

Section: Chapter Questions

Problem 7E

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5. Interest, inflation, and purchasing power
Suppose Devon is a sports fan and buys only football tickets. Devon deposits $4,000 into a savings account that pays an annual nominal interest rate
of 5%. 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 $10.00.
Initially, Devon's $4,000 deposit has a purchasing power of
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 Devon'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 Devon will not buy seven-tenths of a football ticket.
Annual Inflation Rate
0%
5%
8%
Number of Tickets Devon Can Purchase after One Year
Real Interest Rate
400
%
%
%
When the rate of inflation is greater than the interest rate on Devon's deposit, the purchasing power of her deposit
course of the year.
over the

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