Suppose you postpone consumption so that by investing at 8% you will have an extra $800 to spend in one year. Suppose that inflation is 4% during this time. What is the approximate real increase in your purchasing power?
A) $800
B) $600
C) $400
D) $200
Answer: C
Explanation: C) We can see that an inflation rate of 4% is one-half of our 8% rate of investment. Thus, one-half of the $800, or $400, is the real increase in your purchasing power.
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