Please someone show me how to work this one out?
Suppose Caroline is a cinephile and buys only movie tickets. Caroline deposits $3000 in a bank acct that pays an annual interest rate of 20%. You can assume that 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 Caroline’s $3000.00 deposit is a. 3,000 b. 50 c. 220
d. 300 e. 200 movie tickets.
The price of a movie ticket rises at the rate of inflation. For each of the annual inflation rates in the following table, select the corresponding purchasing power of Caroline’s deposit after one year, and enter the value for the real interest rate.
HINT: Round your answers down to the nearest movie ticket. For ex: if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing poser down to 20 movie tickets under the assumption that Caroline will not buy seven-tenths of a movie ticket.
If the annual inflation rate is at 0% what would be the number of tickets Caroline can purchase after one yr.
a.230
b. 53
c.360
d. 220
If the annual inflation rate is at 20%
a. 150
b. 300
c. 50
d. 200
If the annual inflation rate is at 25%
a. 48
b. 288
c. 192
d. 196
If the annual inflation rate is at 0% what is the real interest rate
a. 10%
b. -20%
c. 0%
If the annual inflation rate is at 20% what is the real interest rate
a. 0%
b. -20%
c. 10%
d. 20%
If the annual inflation rate is at 25% what is the real interest rate
a. -25%
b. 10%
c. 20%
d. -5%
When the rate of inflation is less than the interest rate on Caroline’s deposit, the purchasing power of her deposit a. falls b. remains the same c. rises over the course of the year.
1a. $3000.
2. Pt = 3000 * 1.20 = $3600 after 1yr.
N = $3600 / $10. = 360 Tickets.
3. N = $3600 / (1.2*$10) = 300 Tickets.
4. Same procedure as #3.
5. Rate = 20%.
6. Rate = 2o% - 20% = 0%.
7. Rate = 20 - 25 = -5%.
8. The wording of the prob. and the choices doesn't seem to match.However,
as the inflation rate increases from zero, the buying power decreases.
Ah, the joys of finances and inflation! Let's dive in and solve these questions, shall we?
First things first, we need to figure out the initial purchasing power of Caroline's $3000 deposit. Since each movie ticket costs $10, all we have to do is divide $3000 by $10. So, Caroline can buy 300 movie tickets initially. Good start, Caroline!
Now, let's move on to the next set of questions, assuming an annual inflation rate of 0%. If there's no inflation, the price of a movie ticket remains the same, so Caroline can still purchase 300 movie tickets after one year. The answer is d) 300.
If the annual inflation rate is 20%, the price of movie tickets will increase. To find out how many tickets Caroline can buy, we need to subtract 20% of the initial purchasing power (300 tickets) from the initial purchasing power. In other words, 300 - (20% of 300) = 300 - 60 = 240. So, Caroline can buy 240 movie tickets. The answer is d) 240.
For an annual inflation rate of 25%, we follow the same logic. Subtracting 25% of 300 from 300, we get 300 - (25% of 300) = 300 - 75 = 225. This means Caroline can buy 225 movie tickets. The answer is not listed, so let's clown around and say e) Caroline is so good at haggling that she manages to buy 225 movie tickets and get a discount on popcorn!
Now, let's tackle the real interest rates. When the inflation rate is 0%, the real interest rate is just the same as the fixed interest rate, which is 20%. Hurray for accurate deposits! The answer is c) 0%.
If the inflation rate is 20%, the real interest rate is calculated by subtracting the inflation rate from the fixed interest rate. So, 20% - 20% = 0%. Caroline's real interest rate is zero. The answer is a) 0%.
Finally, if the inflation rate is 25%, the real interest rate is found by subtracting 25% from 20%. That gives us -5%. Negative interest? That's not ideal for Caroline. The answer is d) -5%.
Last but not least, when the rate of inflation is less than the interest rate on Caroline's deposit, the purchasing power of her deposit rises over the course of the year. So the answer is c) rises.
I hope I could bring some laughs and clarity to these finance questions! Remember, while money might be serious, it doesn't hurt to have a laugh along the way. Happy ticket purchasing, Caroline!
To solve this problem, we need to understand the relationship between the deposit amount, inflation rate, and movie ticket price.
Let's address the first part of the question:
Caroline initially deposits $3000 in a bank account that pays an annual interest rate of 20%. The price of a movie ticket is $10. So, to find the initial purchasing power of her deposit, we need to divide the deposit amount by the price of a movie ticket.
Initial purchasing power = Deposit amount / Price of a movie ticket
Initial purchasing power = $3000 / $10
Initial purchasing power = 300 movie tickets
Therefore, the initial purchasing power of Caroline's $3000 deposit is 300 movie tickets (option e).
Now, let's move on to the second part of the question:
If the annual inflation rate is 0%, the number of tickets Caroline can purchase after one year will remain the same as the initial purchasing power.
So, the answer is the same as the initial purchasing power: 300 movie tickets (option d).
If the annual inflation rate is 20%, we need to calculate the purchasing power after one year. We can do this by multiplying the initial purchasing power by (1 + inflation rate).
Purchasing power after one year = Initial purchasing power * (1 + inflation rate)
Purchasing power after one year = 300 * (1 + 0.20)
Purchasing power after one year = 300 * 1.20
Purchasing power after one year = 360 movie tickets
Therefore, Caroline will be able to purchase 360 movie tickets after one year (option c).
Similarly, for an inflation rate of 25%, the calculation would be:
Purchasing power after one year = Initial purchasing power * (1 + inflation rate)
Purchasing power after one year = 300 * (1 + 0.25)
Purchasing power after one year = 300 * 1.25
Purchasing power after one year = 375 movie tickets
Therefore, Caroline will be able to purchase 375 movie tickets after one year (none of the given options match).
For the next part of the question, we need to calculate the real interest rate, which is the difference between the nominal interest rate and the inflation rate.
If the annual inflation rate is 0%, the real interest rate would be the same as the nominal interest rate. So, the real interest rate would be 20% (option a).
If the annual inflation rate is 20%, the real interest rate would be the difference between the nominal interest rate (20%) and the inflation rate (20%). So, the real interest rate would be 0% (option a).
If the annual inflation rate is 25%, the real interest rate would be the difference between the nominal interest rate (20%) and the inflation rate (25%). So, the real interest rate would be -5% (option d).
Finally, when the rate of inflation is less than the interest rate on Caroline's deposit, the purchasing power of her deposit rises over the course of the year. So, the answer is c. rises.