5. Interest, inflation, and purchasing power
Suppose Latasha is a cinephile and buys only movie tickets. Latasha 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 Latasha'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 Latasha'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 Latasha will not buy seventenths of a movie ticket.
1. Calculating inflation using a simple price index
Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following
table shows information on the market basket for the CSPI and the prices of each of the goods in 2014, 2015, and 2016.
The cost of each item in the basket and the total cost of the basket are shown for 2014.
4. Inflation and interest rates
The following table shows the average nominal interest rates on sixmonth Treasury bills between 1986 and 1990, which determined the nominal
interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1986 to 1990. (All
rates are rounded to the nearest tenth of a percent.)
3. Comparing salaries from different times
Consider golfers who led the Professional Golfers’ Association of America (PGA) in winnings at different points in time. Note that the winnings are
nominal figures (unadjusted for inflation).
To convert the original earnings of Casper, Miller, and Pavin, use the formula for converting dollar figures from an earlier era into year 2000 U.S.
dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar.