Question

ou have $425 today which is enough to buy 17 shirts. If the price of shirts are expected to increase by 2% over the next year, what (precise) nominal rate would you have to earn to be able to buy 20 shirts next year

Answer 1

Answer:

the nominal rate is 19.65%

Explanation:

The computation of the nominal rate earned is shown below;

The Price of 17 shirts today is $425

Now the price for 20 shirts today is

= $425 × 20 ÷ 17

= $500

Now the real rate needed next year is

= $500 ÷ $425  - 1

= 17.65%

Now the nominal rate needed is

= real rate + inflation rate

= 17.65% + 2%

= 19.65%

Hence, the nominal rate is 19.65%