Question

Engineering Economics help.

1. A. Analyze the relationship between inflation and money

2. Examine the following statement:

    “A dollar in hand today is worth more than a dollar to be received next year, assuming interest rates are positive.”

Answer 1

Relation between money and inflation :

• When inflation rates are very high, the longer you hold money as cash , the more value it loses., So ,you attempt to spend it immediately rather than hold it. In this situation ,money does not act as store of value.

• If inflation rises to very high rates , money's usefulness as a unit of account diminishes . If prices are changing rapidly, communication between buyers and sellers become complicated. Comparing prices becomes complex if all prices are rising rapidly.

• Inflation reduces the usefulness of money as a medium of exchange . In the case of extreme inflation , people may abandon the use of one currency for a more stable one.

As long as interest rates are positive , the present value of sum of money will always be less than its future value.

So as the above statement says that "a dollar in hand today is worth more than a dollar to be recieved next year , assuming positive interest rates " is not a correct statement because dollar recieved in future will be of greater value than a dollar value of today since the interest rate is positive .