Suppose Dina is an avid reader and buys only comic books Din

Suppose Dina is an avid reader and buys only comic books. Dina 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 comic book is priced at $15.00 Initially, the purchasing power of Dina\'s $3,000 deposit is 200 comic books. For each of the annua 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 Dina\'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 infiation 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 2o.? comic books, you would round the purchasing power down to 20 comic books under the assumption that Dina will not buy seven-tenths of a comic book Annual Inflation Rate 10% 0% 13% Number of Comics Dina Can Purchase after One Year 220^ Real Interest Rate 596 When the rate of inflationis equal to the interest rate on Dina\'s deposit, the purchasing power of her deposit of the year over the course

Solution

Initial purchasing power = 3000 / 15 = 200 books ( before the deposit earns any interest )

Interest rate = 10%

Real interest rate = nominal interest rate - inflation

Real interest rate :

10 - 0 = 10%

10 - 10 = 0%

10 - 13 = -3%

No . of comics book purchased after one year

Total amount received = 3000 + 10% of 3000 = 3300

Price = 15$ . Purchased = 3300 / 15 = 220 books

Total amount received = 3300 ( nominal interest rate is fixed)

Price after 10% inflation = 15 + 10% of 15 = 15 + 1.5 = 16.5$ . Purchased = 3300 / 16.5 = 200 books

Total amount received = 3300

Price after 13% inflation = 15 + 13% of 15 = 16.95 . Purchased = 3300 / 16.95 = 194.69 = 194 books

Rate of inflation = interest rate = 10% , the purchasing power remains same = 200 books