Interest, inflation, and purchasing power
Suppose Kyoko is an avid reader and buys only mystery novels. Kyoko deposits $2,000 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 mystery novel is priced at $20.00. Initially, the purchasing power of Kyoko's $2,000 deposit is __ mystery novels. For each of the annual inflation rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Kyoko's deposit atter one year in the first row of the table for each infiation rate. Finaly, 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 mystery novel. For example, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery noveis under the assumption that Kyoko will not buy seven-tenths of a mystery novel.
When the rate of inflation is equal to the interest rate on Kyoko's deposit, the purchasing power of her deposit over the course of the year.