Jermaine lives in a world where the nominal interest rate is 3% and the inflation rate is 1%. today, jermaine has $200, with which he could purchase 80 zaps. however, jermaine realizes he could also put the money in savings for one year; if he did this, then in one year's time he would have - more and would be able to purchase - more zaps. (assume that the price change for zaps reflects the general inflation rate.)

Question

Cristofer Bond

Business

17 February, 17:52

Jermaine lives in a world where the nominal interest rate is 3% and the inflation rate is 1%. today, jermaine has $200, with which he could purchase 80 zaps. however, jermaine realizes he could also put the money in savings for one year; if he did this, then in one year's time he would have - more and would be able to purchase - more zaps. (assume that the price change for zaps reflects the general inflation rate.)

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Zander Farmer · Answer 1

Divide $200 by 80 to get $2.50 price per zap. At 3%, Jermaine's $200 would grow to $206 ($200 x 1.03) = $206 by the end of the year. At the end of one year he would have $6 more and would be able to purchase two more zaps (2 X ($2.50 X 1.03), or 2 X $2.575 = $5.15) He would have $.85 left in change.