Suppose you want to earn a real interest rate of 5%. For inflation rates of 0.0, 1.0, 2.0, …, 9.0, 10.0, 15.0, 20.0, and 50.0%, determine the combined rate of interest you must earn.

"You have a $10,000 monthly loan payment. If annual inflation is 5% (compounded monthly), what is the constant dollar amount of this payment in month 49? Recall that since the annual inflation rate is compounded monthly and payments are made monthly, you can calculate the effective monthly inflation rate simply by dividing the annual inflation rate by 12. "

10

Assume you have won a lottery prize of $5,000, which works out great since you want to buy a new gaming PC that costs $5,500. You decide to save the lottery winnings for one year by purchasing a bank CD with one year until maturity. The interest rate on your deposit is 12% and inflation is expected to be 8% over the next year. You plan to work part-time to make up any shortfall in your savings covering the cost of the gaming PC one year from now. a.  How much money will you have in your bank account at the end of one year? b. What is the real interest rate you expect to earn on your deposit over the next year?  c. Will you have enough money from the savings to buy the PC next year? d. If your answer to c. is no, how many hours of work @ $15/hour will be required to make up the shortfall?