Question

Suppose Amy is an avid reader and buys only comic books. Amy 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 Amy'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 Amy'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: If you find that the deposit will cover 20.7 comic books, you would round the purchasing power to 20 comic books under the assumption that Amy will not buy seven-tenths of a comic book)

Annual Annual Annual
Inflation Rate Inflation Rate Inflation Rate
0% 10% 13%
Number of Comics Amy
Can Purchase after One Year
Real Interest Rate(%)

Answer 1

Answer:

Initially, the purchasing power of Amy's $3,000 deposit is 150 comic books.

annual inflation rate      number of comics Amy can purchase

0%                               ($3,000 x 1.15) / $20 = 172.5 ≈ 172 comics

10%                              ($3,000 x 1.15) / ($20 x 1.1) = 156.8 ≈ 156 comics

13%                              ($3,000 x 1.15) / ($20 x 1.13) = 152.6 ≈ 152 comics

real interest rate:

with 0% inflation rate = 15%

with 10% inflation rate = 5%

with 13% inflation rate = 2%

Explanation: