Author Question: Suppose you postpone consumption so that by investing at 8 you will have an extra 800 to spend in ... (Read 108 times)

sheilaspns · **on:** Jul 10, 2018

Suppose you postpone consumption so that by investing at 8 you will have an extra 800 to spend in one year. Suppose that inflation is 4 during this time. What is the approximate real increase in your purchasing power?

A) 800
B) 600
C) 400
D) 200

Question 2

Suppose you postpone consumption and invest at 9 when inflation is 3. What is the approximate real rate of your reward for saving?

A) 3
B) 5
C) 6
D) 7

ApricotDream · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: C
Explanation: C) We can see that an inflation rate of 4 is one-half of our 8 rate of investment. Thus, one-half of the 800, or 400, is the real increase in your purchasing power.

Answer to Question 2

Answer: C
Explanation: C) We can see that an inflation rate of 3 is 6 less than our 9 investment rate. Thus, 6 is the real rate of your reward for saving.