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3 years ago

5. Interest, inflation, and purchasing power

Business

1 answer:

White raven [17]3 years ago

3 0

Answer:

Initially the purchasing power of her $3000 deposit is 300 (3000/10) baseball caps.

Annual Inflation rate 0 %

Price of base ball cap $10

3000*1.05=3150

Purchasing power= 3150/10= 315 caps at 0 percent inflation

Annual Inflation rate 5 %

Price of baseball cap = 10*1.05= 10.5

Purchasing power = 3150/10.5

=300 caps at 5 percent inflation

Annual Inflation rate 8%

Price of baseball cap =10*1.08= 10.8

Purchasing power =3150/10.8

=291 caps at 8 percent inflation

Real interest rates

(1+nominal interest rate)= (1+inflation)(1+real interest rates)

Real rate at 0 percent inflation

1.05=1(1+R)

R=1.05-1

R=0.05= 5%

Real rate at 5 percent inflation

1.05=1.05*(1+r)

R=0%

Real rate at 8 percent inflation

1.05=1.08*(1+r)

=-0.02

=-2%

Explanation:

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