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You have 50,000BD which you can use to either buy cars or to deposit in a bank account for 1 year
You have 50,000BD which you can use to either buy cars or to deposit in a bank account for 1 year. Inflation for the year is estimated to be 7 percent, and the bank deposit rate is 4.5 percent. If you had a goal of purchasing as many cars as possible, when should you buy them
Select one:
a. Not enough information to decide
b. After a year
c. Now
d. After 2 years
Expert Solution
Option C "NOW" is correct
Since inflation is more than the rate of interest offered on bank deposit, we will buy car "now"
Explanation
As time will pass purchasing power of our money will reduce and we will be able to buy less goods as inflation is more than the rate offered by bank on deposits
Example
If we have $100 today and price of a commodity X is $100, we can buy this commodity today but if we choose to invest this $100 at 4.5% in a bank we will recieve 104.5 after one year buy the price of commodity X will be 107 (due to 7% inflation) therefore buying "NOW" is the correct answer
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