Determine the new price of a movie ticket

Reference no: EM13747617

Suppose Ana is a cinephile and buys only movie tickets. Ana deposits $3,000 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 movie ticket is priced at $10.00.

Initially, the purchasing power of Ana's $3,000 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 Ana'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 Ana will not buy seven-tenths of a movie ticket.

                                      Annual Inflation Rate

                                                              0%                5%                8%

# of tickets she can purchase after 1 year   _____           _____           ______

Real interest rate                                      ____             _____          _____

When the rate of inflation is less than the interest rate on Ana's deposit, the purchasing power of her deposit (remains the same/falls/rises) over the course of the year.

Reference no: EM13747617

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