Parvez Is Trying to Decide Whether or Not He Should

question 154

Multiple Choice

Parvez is trying to decide whether or not he should lend $1,000 to Eli for a year.Eli would pay a fixed nominal interest rate of 8 percent.Parvez expects the inflation rate to be 4 percent for the year.If he does not lend the $1,000 to Eli,Parvez will purchase an indexed savings bond that pays an interest rate of 4 percent,or he will put the money in a (nonindexed) savings account earning 6 percent.Parvez

• A) will earn 4 percent in real terms if he loans Eli the money,0 percent in real terms if he buys the bond,and 6 percent in real terms if he puts the money into a savings account
• B) is better off holding his money as cash
• C) is indifferent between lending the money to Eli and buying the bond because the real interest rate is the same in either case
• D) should purchase the bond because it earns the highest real rate of interest
• E) earns the highest real rate of interest if he puts his $1,000 into a savings account

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Definitions:

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The unintentional ingestion, inhalation, or absorption through the skin of harmful substances, leading to health complications or death.

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A major feature of the brain, responsible for regulating motor movements, balance, and coordination.

Prefrontal Cortex

The front part of the frontal lobe in the brain, associated with decision making, complex cognitive behavior, personality expression, and moderating social behaviour.