When the rate of inflation exceeds the rate of return on the most profitable investment available, the difference bet...

Mazen February 1, 2020

Please examine my analysis and correct me if necessary.

Hello, It might be painful to read the analysis of a student. And it is probably much better to start fresh rather than getting in the weeds of an apprentice. And if you determine that my discussion is too risky, confused/confusing, no problem, ignore it and give me your version. Not withstanding that, I ask you to please give my analysis a chance. By the way, I read the post on this question. Both instructors are very helpful. However, I, with all due respect and deference, disagree with diagraming "the most profitable investment" the way AngelaK did: attached with ROR (the rate of return) and this is why: I see "the most profitable investment" as controlling of the dynamic between the ROI and ROR. It is IT (i.e., the most profitable investment) that will be negated in the contrapositive and NOT the subtraction sentence between ROI and ROR. The mathematical truth of subtraction imposed by the stimulus dictate that when the rate of inflation (ROI) is greater than the rate of return (ROR), then the value of the investment declines (VD) by that difference between these two rates; AND that "that difference" is at its minimum when the investment is at its most profitable. In other words, ROI must be greater than ROR for the Value of the investment to decline. ROI has to be > than ROR. It further dictates that when ROR increases and ROI stays constant this difference between the two rates approaches zero. With this in mind, Answer choices A, B, and D, are eliminated, because all three could be true, we won't unless we know what's happening with the rate that the answer choice left out; E is wrong because it contradicts the logic of the argument; which leaves us with C. C is correct because "the most profitable investment is controlling" the relationship between the rates. Please let me know whether I should abandon my interpretation. I will, if you deem it false. Thank you

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Annie February 14, 2020

Hi @Mazen,

This is an odd question, but in the end is just a must be true question. You are looking for the information to complete the sentence in way that makes it true.

You're analysis is correct but I want to give you an idea for a possibly quicker way to solve this. When you have an abstract idea that involves numbers, like that provided here, sometimes it's best to plug in some numbers and see what the result is.

Here's how it could work for this question:

We'll say the best investment available is worth $100. If it's rate of return is 10%, but the rate of inflation is 11%, the difference between those rates is 1%. The minimum value that any investment will decline is then 1%.

So, if the value of a different investment declines by 2%, that must mean it's rate of return is lower than 10%. This means this investment is less profitable than the first investment, aka that answer C is correct.