5. Interest, inflation, and purchasing power Suppose Diamond is a sports fan and buys only football tickets. Diamond 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 football ticket has a price of $20.00. Initially, Diamond's $2,000 deposit has a purchasing power of 100 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 Diamond'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 Diamond will not buy seven-tenths of a football ticket. Number icke Diamond Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 20% 100 ▼ % % 23% When the rate of inflation is less than the interest rate on Diamond's deposit, the purchasing power of her deposit course of the year. over the

5. Interest, inflation, and purchasing power Suppose Dalton is an avid reader and buys only reusable tote bagses. Dalton 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 reusable tote bags has a price of $10.00. Initially, Dalton's $4,000 deposit has a purchasing power of reusable tote bagses. For each of the annual inflation rates given in the following table, first determine the new price of a reusable tote bags, assuming rises at the rate of inflation. Then enter the corresponding purchasing power of Dalton'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 reusable tote bags. For example, if you find that the deposit will cover 20.7 reusable tote…

5 On March 7, 2018, you could read in The New York Times that the Governor of West Virginia offered the state's teachers "a 1 percent a year raise for the next five years." The article noted that "if inflation averages 2 percent a year for that period, this translates into an effective 5 percent pay cut." [R170] Is the “5 percent pay cut” claim correct

Suppose that you are considering whether to enroll in a summer computer-training program that costs $3,600. If you take the program, you will have to give up $1,800 of earnings from your summer job. You figure that the program will increase your earnings by $600 per year for each of the next 10 years. Beyond that, it is not expected to affect your earnings. Suppose the interest rate is 10% Use the preceding information to calculate the present value of the wage increase resulting from the training program. Then decide whether the investment is worthwhile, given the present value of the cost of the training program. At this interest rate, the present value of the increase in wages is about the training. Thus, from a strictly monetary viewpoint, you than the present value of the total cost of , which is participate in the training program.