Becky is seeking to expand her stamp collection.Each year,stamps increase in price at a seven percent rate.She believes that if she invests her money for one year,she should be able to buy 24 stamps for what 23 stamps would cost today.What is her real interest rate or reward for waiting?

Question

Quizplus · Accepted Answer

Let x be the current price of one stamp. According to the problem, if Becky waits for one year, she will be able to buy 24 stamps for the price of 23 stamps today. This can be represented by the equation:

24x = 23(1.07)x

Simplifying and solving for x, we get:

x = 1.07x/24
x = 0.0435

Therefore, the real interest rate or reward for waiting is:

(0.0435 - 0.01) / 0.01 = 3.35%

However, the question asks for the nominal interest rate, which is simply the annual increase in stamp prices, or 7%. So the best choice is:

Answer: A) 4.35%

Becky Is Seeking to Expand Her Stamp Collection