Question

Marilyn has $20 that she can spend on candy that costs $0.25 per piece. She could buy 80 pieces today. The nominal rate of interest on a 2 year deposit is currently 8%, and the expected rate of inflation over the coming 2 years is 7%. If Marilyn invested the $20, how many pieces of candy could she buy in two years?

Answer 1

Marilyn could buy approximately 87 pieces of candy in two years.

Step-by-step explanation:

To calculate the number of pieces of candy Marilyn could buy in two years, we need to consider inflation and interest rate. First, let's calculate the future value of her $20 investment after two years:

`Future Value = Principal x (1 + Interest Rate) ^ Number of Years`

`= $20 x (1 + 8)^2 = 20 * 1.08^2`

= $20 x 1.1664

= $23.33

Next, let's consider the expected rate of inflation over the two years, which is 7%. To find the buying power, we divide the future value by (1 + Inflation Rate):

Buying Power = Future Value / (1 + Inflation Rate) = $23.33 / (1 + 7%) = $23.33 / 1.07 = $21.79

Therefore, Marilyn could buy approximately 21.79 / 0.25 = 87 pieces of candy in two years.