The incredible shrinking $50 bill in 1957 was worth $50, but in 2007 it is worth only $. a. What was the compounded average annual inflation rate (loss of purchasing power) during this period of time? b. Fifty dollars invested in the stock market in 1957 was worth $ in 2007. In view of your answer to Part (a), what was the annual real interest rate earned on this investment?

A. 4.02%

B. 3.49%

Explanation:

a. Computation of the compounded average annual inflation rate during this period of time

Using this formula

Annual inflation rate=FV/ P *(1+i)^t

Where,

t = 2007 - 1957 = 50 yrs

FV = 6.42

P = 50

Let plug in the formula

Annual inflation rate = (6.42 / 50)^(1/50) - 1

Annual inflation rate= 0.1284 ^ 0.02 - 1

Annual inflation rate= 0.959779 - 1

Annual inflation rate= -0.0402208 *100%

Annual inflation rate=4.02%

b. Computation of the annual real interest rate earned on this investment

First step is to find the Norminal ROR

Using this formula

Norminal ROR

= FV/ P *(1+i)^t

Where

FV = 1998

P = 50

let plug in the formula

Norminal ROR = (1998 / 50)^(1/50) -1

Norminal ROR= 39.96 ^ 0.02 - 1

Norminal ROR= 1.076545 - 1

Norminal ROR= 0.0765457 *100

Norminal ROR= 7.65%

Last step is to calculate for annual real interest rate earned using this formula

Annual real interest rate earned = (1+ Nominal ROR) / (1+ Inflation) -1

Let plug in the formula

Annual real interest rate earned=(1+0.0765457) / (1+0.0402208) - 1

Annual real interest rate earned= (1.0765457) / (1.0402208) - 1

Annual real interest rate earned= 1.034920 - 1

Annual real interest rate earned= 0.0349*100

Annual real interest rate earned=3.49%

Therefore the Annual inflation rate will be 4.02% while Annual real interest rate earned will be 3.49%

b, fewer problems later! good luck

the correct answer is economics is a game without winners or losers.

unlike sports or games economic is a game without losers or winner rather it is a game where everyone wins. parties of business doing businesses exchange money with each other and hence exchange is done on the basis of goods. one party takes the goods and other sales it so there is winner on both sides. each party values more highly the good it gets than the good it gives up. both sides exchange only because both intend to increase their value. so there is no concept of lose or win.