Answer to Question #85987 in Macroeconomics for Annie

Question

a.A small business owner is deciding whether to purchase new machinery for her business. She would charge the cost of the machine to her credit card, which charges 22.9 percent interest. It is a “pass- through” business; what she earns in her business is her personal income. Money she spends on the business is money she doesn’t have available to spend on herself and her family. Which inflation rate is relevant in estimating her real rate of interest? Why?
b. The investment equation is

Answer 1

a.The inflation rate is not higher than 22.9 percent interest if she estimates her real rate of interest.

b. Investment problems usually involve simple annual interest (as opposed to compounded interest), using the interest formula I = Prt, where I stands for the interest on the original investment, P stands for the amount of the original investment (called the "principal"), r is the interest rate (expressed in decimal form), and t is the time.

Source:

https://www.purplemath.com/modules/investmt.htm