Suppose Janet is a cinephile and buys only movie tickets. Janet deposits $2,000
ID: 1154972 • Letter: S
Question
Suppose Janet is a cinephile and buys only movie tickets. Janet 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 movie ticket is priced at $20.00.
Initially, the purchasing power of Janet's $2,000 deposit is ___ 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 Janet'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 Janet will not buy seven-tenths of a movie ticket.
Annual Inflation Rate
When the rate of inflation is greater than the interest rate on Janet's deposit, the purchasing power of her deposit rises/remains the same/falls over the course of the year.
Annual Inflation Rate
0% 15% 18% Number of Tickets Janet Can Purchase after One Year Real Interest RateExplanation / Answer
Initially, the purchasing power of Janet's $2,000 deposit is = 2000/20 = 100 movie tickets.
New price = (1 + inflation rate) x price
Real interest rate = Nominal interest rate - inflation rate
Number of tickets Janet can purchase = 2000 x (1 + 15%) / new price
When the rate of inflation is greater than the interest rate on Janet's deposit, the purchasing power of her deposit falls over the course of the year.
Annual Inflation Rate 0% 15% 18% New price 20 23 23.6 Number of Tickets Janet Can Purchase after One Year 115 100 98 Real Interest Rate 15% 0% -3%Related Questions
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