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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