You sign a contract to pay $1000 next year for the refrigerator you bought today. The rate of inflation is 10% and the real interest rate is 7%. Alternatively, you could pay $875 today. What should you do to save the most money?
What will be an ideal response?
1000/[(1 + .1 ) ? (1 + .07)] = $849.60. This is the real present value of the $1000 payment next year. Thus, you should pay next year and not today in order to save the most money.
Economics
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Which of these is NOT one of the issues that makes it difficult for the Fed to choose the right course of action at the right time?
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