You have £2,000 and you can only choose one of the following two investments. First, you may deposit the sum of £2000 at an interest rate of 7% for one year. There is 60% probability that inflation will run at 5% for the next year and a 40% probability that inflation will run at 2%. The second investment allows you to deposit a fixed sum of only £1500 at a certain inflation adjusted (real) return of 8% for one year, but you must keep the rest of your money in a cash account. Which of the two schemes would you take?

You have £2,000 and you can only choose one of the following two investments. First, you may deposit the sum of £2000 at an interest rate of 7% for one year. There is 60% probability that inflation will run at 5% for the next year and a 40% probability that inflation will run at 2%. The second investment allows you to deposit a fixed sum of only £1500 at a certain inflation adjusted (real) return of 8% for one year, but you must keep the rest of your money in a cash account. Which of the two schemes would you take?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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