Suppose You Have $1,000, Which You Can Put in Two

question 88

Essay

Suppose you have $1,000, which you can put in two different types of accounts at a bank. One account pays interest of 9 percent per year; the other pays an interest rate of 3 percent per year plus the rate of inflation. Calculate the amount of money you will have at the end of one year if the inflation rate is 5 percent. What is the real rate of return in each case? Which account would you prefer if you expected inflation to be 8 percent?

---

Definitions:

Government

The organization, apparatus, or agency through which a political unit exercises authority and performs functions and which is usually classified according to the distribution of power within it.

Equilibrium Market Price

The price at which the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers, leading to a state of market balance.

Price Floor

A government- or authority-imposed minimum price below which a certain product cannot be sold, typically above the equilibrium price to ensure producers receive a minimum income.

Government

The organizational structure through which a society makes and enforces its public policies and exercises authority over its citizens.