Question

Suppose that you are running a business, and you need some extra space for one year. Your bank offers you a loan of $200,000 at 0% Interest. You consider borrowing this amount to buy the building, use it for one year, and then sell the building to pay back the loan. Unfortunately, the economy in which you are operating is experiencing deflation at the rate of 10% per year. After one year, you should be able to sell the building for Suppose that owning the building for a year would eam y ou to decide whether you will be better off by owning it for one year and then selling it, you seek advice from three different people: (11 $180,000 r says that you should not buy the building because in one year it will cost you $200,000. (2) Your accountant says that you should defin b uilding because you can borrow $200,000 at zero interest while the building will generate $12,000 in extra income. Then when you se sa b e $12,000 richer. (3) Your bookkeeper says that if you sell the building in a year, you will have to come up with more money to pay off the loan than you will make in extra income. Keeping in mind that the economy experiences deflation at the rate of 10%, your is right because: When the nominal interest rate is zero, the cost of a building is its full purchase price The extra income you will earn will be less than the cost of owning the building for the year When the nominal interest rate is zero, you do not incur any cost when you take out a loan Now, suppose you inherit $200,000 in cash from your uncle who had kept it hidden in his mattress in the nominal interest rate is -1%, which of the following options will maximize the amount of cash that you have in one year?

Answer 1

answers

1-    180,000

2 bookkeeper 

The extra income you will earn will be less than the cost of owning the building for the year.

3 Holding on to your $200,000 in cash

4 

 A high real interest rate will keep firms from borrowing to finance investment in capital, but it will not keep firms with cash from investing in capital.

True

False