Question

You read that inflation for the foreseeable future expected to average 6% a year. You are trying to accumulate funds to start a business, and so you take your excess earnings and

A) put them in a box in your closet instead of a savings account because the bank is only paying 2% which is half the inflation rate.
B) put them in a box in your closet instead of a savings account because the bank is only paying 4% which is only 2/3 of the inflation rate.
C) put them in a box in your closet instead of a savings account because the bank is only paying 6% which just equals the inflation rate.
D) put the money in a savings account regardless of the interest, because any positive rate will reduce the negative impact of inflation on the accumulated savings.

Answer 1

ANSWER – D (put the money in a savings account regardless of the interest, because any positive rate will reduce the negative impact of inflation on the accumulated savings)

It is established that any positive rate (interest) on accumulated savings, no matter how little it is, reduces the negative impact of inflation. This means that even the minutest interest paid by a bank, though it may not alleviate the negative impact of inflation, is still better than nothing.

Answer 2

D) put the money in a savings account regardless of the interest, because any positive rate will reduce the negative impact of inflation on the accumulated savings.

Step-by-step explanation:

Inflation is the increase in the prices of products and services and it reduces the value of the currency. So, if you read that inflation for the foreseeable future is expected to average 6% a year and you decide to put your excess earnings in a box, your money will be losing 6% in value. Because of this, the best thing you can do is to put your money in a savings account that will pay you an interest that will help you reduce the loss in value of your money or even avoid that according to the interest rate you receive.