Angel is seeking to expand her rare stamp collection.Each year,rare stamps increase in price at a three percent rate.She believes that if she invests her money for one year,she should be able to buy 16 stamps for what 15 stamps would cost today.What is her real interest rate (or reward for waiting)?

Question

Quizplus · Accepted Answer

Angel's real interest rate can be calculated by finding the rate at which the purchasing power of her investment increases. If she can buy 16 stamps for the price of 15 stamps today, her money's purchasing power increases by $\frac{16}{15} = 1.0667$ or 6.67%. This means she gets 6.67% more stamps for her money after one year, indicating her real interest rate is about 6.67%.

Angel Is Seeking to Expand Her Rare Stamp Collection