If you have an investment with 1% return but inflation is 3%, at the end of the year you will have:
A. Less purchasing power
B. The same purchasing power
C. More purchasing power
Answer (2)
Investment return is 1%, while inflation is 3%.
Compare the investment return rate with the inflation rate.
Since 1% < 3%, the investment return does not keep pace with inflation.
Therefore, at the end of the year, you will have less purchasing power. L ess p u rc ha s in g p o w er
Explanation
Understanding the Problem Let's analyze the problem. We have an investment that grows by 1% in a year. However, the prices of goods and services also increase by 3% due to inflation. We need to determine whether our investment's growth outpaces the increase in prices, which will tell us if we have more, less, or the same purchasing power at the end of the year.
Comparing Return and Inflation To determine the impact on purchasing power, we need to compare the investment return rate with the inflation rate. If the investment return is higher than inflation, our purchasing power increases. If it's the same, our purchasing power remains constant. If the investment return is lower than inflation, our purchasing power decreases.
Determining the Outcome In this case, the investment return is 1%, and the inflation rate is 3%. Since 1% is less than 3%, the investment return does not keep pace with inflation.
Final Answer Therefore, at the end of the year, you will have less purchasing power because the cost of goods and services will have increased more than the value of your investment.
Examples
Imagine you bought a basket of groceries for $100 at the beginning of the year. With 3% inflation, that same basket will cost $103 at the end of the year. If you invested $100 and earned 1%, you would have $101. Even though you have more dollars, you can't buy the same amount of groceries as you could at the start of the year. This concept is crucial in personal finance, helping individuals understand the real return on their investments after accounting for inflation, and make informed decisions about savings and spending.
At the end of the year, you will have less purchasing power because the investment return of 1% does not keep up with inflation at 3%. Therefore, the correct choice is A. Less purchasing power.
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