Answered: Number of Comics Dina Can Purchase…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose Dina is an avid reader and buys only comic books. Dina 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 comic book is priced at $10.00.

Initially, the purchasing power of Dina's $3,000 deposit is

comic books.

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

This interactive diagram explores the relationship between interest rates, inflation, and purchasing power. It includes:

1. **Title**: Annual Inflation Rate

2. **Columns**:
- Represents different inflation scenarios: 0%, 5%, and 8%.

3. **Rows**:
- **Number of Comics Dina Can Purchase after One Year**: A dropdown menu where users can select different values.
- **Real Interest Rate**: A field to enter percentage values.

4. **Statement**:
- "When the rate of inflation is less than the interest rate on Dina's deposit, the purchasing power of her deposit" followed by a blank line for completion with a dropdown menu.

This tool helps users understand the effect of inflation on real interest rates and purchasing power, specifically related to how many comics Dina can buy after one year. Users adjust values to see various scenarios and outcomes.

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