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

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?