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:
