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

Shunhe on August 19, 2020

Hi @ankita96,

Thanks for the question! So this is basically a must be true question, where you’re completing the argument with something that must be true. So what’s happening up top? Well, we’re told that then the rate of inflation is bigger than the rate of return on the most profitable investment available, the difference between those rates is the percentage by which the value of any investment will decline at a minimum. And so if a particular investment declines by more than that percentage, then something has to be true, and that’s what we have to figure out here.

So let’s say we have the most profitable investment. It has some rate of return, say 10%. And then the rate of inflation is going to exceed that. So let’s say inflation’s at 15%. So that means that the difference between those two is 5%, so the value of that most profitable investment is going to decline by 5%.

So now let’s say we have another investment, and that’s declining by 10%.Well, that means that since inflation’s still at 15%, that investment’s rate of return is 5%. And that means it’s less profitable than the most profitable investment. So the correct answer is (C), that the investment in question is less profitable than the most profitable investment available.

Hope this helps! Feel free to ask any other questions that you might have.

on August 19, 2020

Oh, okay that makes sense! Thank you

Shunhe on August 20, 2020

You're welcome!