If the Rate of Inflation Is Greater Than the Interest

question 14

Multiple Choice

If the rate of inflation is greater than the interest rate,

• A)you should consume all of your wealth in the first period.
• B)you are better off keeping your money in a mattress at home (assuming no risk of it being stolen)than at a bank.
• C)you will necessarily consume less this period than you would if the rate of inflation were less than the interest rate.
• D)you will necessarily consume more this period than you would if the rate of inflation were less than the interest rate.
• E)None of the above.

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Definitions:

Rent for Equipment

The cost incurred for borrowing equipment necessary for the operations of a business or project.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities, representing the ownership equity of the shareholders.

Assets

Economic resources owned or controlled by a business or individual that are expected to provide future benefits.

Stockholders' Equity

The value of a company's assets minus its liabilities, representing the ownership interest of the shareholders.