Question

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

Answer 1

-Today's scenario:

$ 425 and 17 shirts can be bought through this amount.

= $425/17 = $25

Price of the shirt is expected to increase by 2 %

so, suppose if you buy 20 shirts in current year (today) then the amount required would be:

= $ 25 * 20 shirts = 500

but there is an expected in increase of 2 % in the next year.

so multiply the rate of 2 % with $ 500

which is equal to $10

Total amount required to buy 20 shirts is as follows:

= $500 + $ 10 = $ 510

and to calculate the approximate nominal rate that you have to earn to buy 20 shirts.

= $ 10 / $ 510 * 100 = 1.96 % approximately.

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