8 . Interest, inflation, and purchasing power

Suppose Dalia is a sports fan and buys only football tickets. Dalia deposits $4,000 into a savings account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00.

Initially, Dalia's $4,000 deposit has a purchasing power of

football tickets.

For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dalia'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 downto the nearest football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football tickets under the assumption that Dalia will not buy seven-tenths of a football ticket.

	Annual Inflation Rate
0%	10%	13%
Number of Tickets Dalia Can Purchase after One Year	220	100
Real Interest Rate

When the rate of inflation is less than the interest rate on Dalia's deposit, the purchasing power of her depositremains the same over the course of the year.