Josephine 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

The price increase of 3% means the cost of 15 stamps today will be the cost of 15 * 1.03 stamps next year. To buy 16 stamps next year, the real interest rate must cover the additional cost, which is approximately 6.67%.

Josephine Is Seeking to Expand Her Rare Stamp Collection