Question

< Back to Assignment Attempts: Keep the Highest: /3 5. Interest, inflation, and purchasing power Suppose Frances is a cinephile and buys only movie tickets. Frances deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $15.00. Initially, the purchasing power of Frances's $3,000 deposit is 200 movie tickets. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Frances'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 movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Frances will not buy seven-tenths of a movie ticket. Annual Inflation Rate 0% 10% 13% Number of Tickets Frances Can Purchase after One Year 200 194 Real Interest Rate % % % over the When the rate of inflation is less than the interest rate on Frances's deposit, the purchasing power of her deposit course of the year.

Answer 1

Answer:

Initially price of movies ticket=$15

Frances intial amount=$3000

Purchasing power of france is=3000/15=200

Thus, Initially, the purchasing power of Beth $3000 deposit is 200 MOVIES TICKETS.

ANNUAL INFLATION RATE	0%	10%	13%
NOMINAL INTEREST RATE	10%	10%	10%
REAL INTEREST RATE	10% - 0 = 10%	10% - 10% = 0%	10% - 13% = -3%
NUMBER OF MOVIE TICKET PURCHASE AFTER ONE YEAR	220	200	194

Solution:

ANNUAL INFLATION RATE : 0%

When there is no inflation,the price of a movie ticket would be 20 after a year and the deposit will increase to 3000*(1+0.10) = 3300

Purchasing power = 3300/15 = 220

Real interest rate = 10 – 0 = 10%

ANNUAL INFLATION RATE : 10%

When the inflation is 10%,the price would increase to 15*(1+0.10) = 16.5

Purchasing power = 3300/16.5 = 200

Real interest rate = 10-10=0%

ANNUAL INFLATION RATE : 13%

When the inflation is 13%,the price would increase to 15*(1+0.13) = 16.95

Purchasing power = 3300/16.95 = 194

Real interest rate = 10 – 13 = -3%

When the rate of inflation is less than the interest rate on of france deposit increases over the course of the year because when money is deposited in the of france the interest rate is applicable.