6.Suppose that you had savings deposited in an account at an interest rate of 5 percent...

6.Suppose that you had savings deposited in an account at an interest rate of 5 percent and your father told you that he earned 10 percent interest 20 years ago.

Which of you was getting the better return?

How would your answer change if you were told that the inflation rate in the United States was 12 percent 20 years ago and is 3 percent now?

7.Suppose you have $1,000, which you can put in two different types of accounts at a bank. One account pays interest of 8 percent per year; the other pays interest of 2 percent per year plus the rate of inflation.

Calculate the real return you will receive after one year if the inflation rate is 5 percent.

Which account will you choose if you expect the rate of inflation to be 8 percent? Why?

Expert Solution

Rahul Sunny answered 1 year ago

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