Question

Suppose Kate is an avid reader and buys only comic books. Kate deposits $2,000 in a bank account that pays an annual nominal interest rate of 15%. 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 $20.00.
Initially, the purchasing power of Kate's $2,000 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 Kate'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 Kate will not buy seven-tenths of a comic book.

Answer 1

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