I\'m not sure how to solve for the new number of tickets that can be purchased,

Question

I'm not sure how to solve for the new number of tickets that can be purchased, no the real interest rate. Mind s. Interest, inflation, and perchasing power Seppose Straron is an avid reader and buys only comic books. Sharon depocit: $2,000 in a bank account that pays an annusal nominal interest rate of 10%. Amme this interest rate is fired-that is, it wont change over time. At the time of depoait, acomic book is priced at $10.00. lioaly, the purchasing power af Sharon's $2,000 deposit is 2001 comic books. For euch of the snrual inelution rates given in the teloweing table, fest determine t the new price of a comke book, assuming it rises at the rate of ofiation. Thon erter the vaufor the real interest rate ate ch ofthe given inflation rates. enter the corresponding purchasing power of Sharow's deposit after one year i the first row of the table for each infation rate. Finaly, Hiat: Roand your answers in the first row down to the nearest comikc book, For example, if you find that the deposit will cover 207 comic books, you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assamption that Sharon will not buy seven-tenths of a comic book. Annual Inflation Rate 0% 10% 13% Number of Comics Sharon Can Purchase after One Year Real Interest Rate 270 V when the rate of inflation is less than the interest rate on Sharon's deposit, the purchasing power of her deposit course of the year i es over the

Explanation / Answer

Initial purchasing power = $2,000 / $10 = 200 books.

When inflation increases by X%, purchasing power decreases by X%.

Real interest rate = nominal interest rate - Inflation

When Annual inflation = 0, Real interest rate = nominal interest rate

So, price of books and Purchasing power remains the same & Number of books = 200

When annual inflation = 10%, price of book = $10 x 1.1 = $11

Number of books can be purchased = $2,000 / $11 = 181

Real interest rate = 10% - 10% = 0

When annual inflation = 13%, price of book = $10 x 1.13 = $11.3

Number of books can be purchased = $2,000 / $11 = 176

Real interest rate = 10% - 13% = - 3%

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