Question

You 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

The precise nominal rate you have to earn to be able to buy 20 shirts next year is $510.

Step-by-step explanation:

a) Data and Calculations:

Earnings today = $425

Number of shirts bought = 17

Therefore, the cost of each shirt = $425/17 = $25

If the price of shirts increases by 2%, the new cost will be $25.50 ($25 * 1.02)

This implies that to be able to buy 20 shirts next year, you will earn $510 ($25.50 * 20).

b) In this case, earnings are influenced by the number and price of shirts needed next year.