5. Interest, inflation, and purchasing power Suppose Eileen is a sports fan and buys only baseball caps. Eileen deposits

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5 Interest Inflation And Purchasing Power Suppose Eileen Is A Sports Fan And Buys Only Baseball Caps Eileen Deposits 1 (44.12 KiB) Viewed 17 times

5. Interest, inflation, and purchasing power Suppose Eileen is a sports fan and buys only baseball caps. Eileen deposits $4,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $10.00. Initially, the purchasing power of Eileen's $4,000 deposit is baseball caps. For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Eileen'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 baseball cap. For example, if you find that the deposit will cover 20.7 baseball caps, you would round the purchasing power down to 20 baseball caps under the assumption that Eileen will not buy seven-tenths of a baseball cap. Number of Caps Eileen Can Purchase after One Year Real Interest Rate 0% Annual Inflation Rate 5% 8% When the rate of inflation is greater than the interest rate on Eileen's deposit, the purchasing power of her deposit course of the year. Grade It Now rises remains the same falls over the Save & Continue Continue without saving