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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Mazen February 1, 2020

Correction: I meant Melody: not Angela.

denleybishop January 4, 2023

OK so we have to look at the rate of the two factors and that is why B is wrong?

Emil-Kunkin February 23, 2023

I think a useful concept here is called real returns, which is just the rate of return minus inflation. So, if inflation is 10 percent and the return is 5 percent, then real returns are negative 5 percent. Or, if inflation is two percent and an investment yields 5 percent, then the real return on that investment is 3 percent.

This question sets up a hypothetical in which there is a maximum possible rate of return, which then gives us a maximum possible real return, which is the max rate minus inflation. Thus, we know that any investment whose real rate of return is less than the maximum real rate of return, then it's non inflation adjusted rate of return is also less than the max non inflation adjusted rate.