Okay let's break the stimulus down. We know that when the rate of inflation exceeds the rate of return on the most profitable investment available, the difference between those rates will be the percentage by which, at a minimum, the value of any investment will decline. So our diagram will look like this:
(Rate of Inflation) > (Rate of Return on Most Profitable Investment) ==> [(Rate of Inflation) - (Rate of Return on Most Profitable Investment)] = (Percentage by which the Value of Any Investment Will Decline)
(RI) > (RRMPI) ==> [(RI) - (RRMPI)] = (%VID)
not [(RI) - (RRMPI)] = (%VID) ==> not (RI) > (RRMPI)
The next sentence says, "If in such a circumstance the value of a particular investment declines by more than that percentage (i.e. not [(RI) - (RRMPI)] = (%VID)) it must be true that..."
As you can see the second sentence is merely invoking the contrapositive of the first statement. Thus, if we have "not [(RI) - (RRMPI)] = (%VID)" then it is necessary that we have "not (RI) > (RRMPI)," i.e. answer choice "(C) the investment in question is less profitable than the most profitable investment available."
Hope that was helpful! Let us know if you have any other questions.
BatmanApril 10, 2014
Thanks a lot for your explanation! However, don't we need to distinguish "value of ANY investment" from "value of a PARTICULAR investment"? Aren't they different?
Many thanks,
NazApril 15, 2014
No. In this case they are not different. The words "any investment" refer to any ONE investment, i.e. any one specific investment. Likewise, the words "particular investment" merely refer to a specific investment, i.e. one specific investment. So, they are referring to the same thing.
Hope that was helpful. Let us know if you have any other questions.
BatmanApril 16, 2014
Thanks a lot again!!!^^
Ashley-TienJuly 5, 2018
Is there another way to approach the question aside from diagramming? I didn't see any quantifiers, so I didn't even think to diagram. The economics language is what confused me most
Ashley-TienJuly 5, 2018
how do you eliminate B?
ChristopherJuly 6, 2018
@Ashley-Tien
Getting good at diagramming questions like this will be the best way to be consistent and accurate in your approach, but let's look at it in practical terms to understand it better. The question is comparing the rate of inflation with the rates of investments saying that if inflation is outpacing the investment option with the best returns on the market, then the difference in those rates is the minimum rate at which ANY investment must be losing value.
So say inflation is 15% and the best investment on the market is 10%. That means that the investment is is losing 5% as compared to inflation. Since it is the best investment on the market, ANY OTHER investment will be losing at least 5% against inflation as well.
The question goes on to ask what MUST BE TRUE of a particular investment if it is losing MORE than 5%. (C) says that it must be less profitable than the most profitable option on the market, which must be true. If the investment in question is losing 7% against inflation, then it is only making 8% whereas the most profitable option is making 10%.
(B) is wrong because it equates being less profitable with being less valuable. The investment in question could have been getting more profitable - going from 4% to 6% to 8% but still be losing value against inflation. The investment WOULD be losing value, and it COULD be losing profitability, but we're looking for a MUST be true, so while (B) COULD be true, it isn't necessarily true.
Does that help?
Ashley-TienJuly 7, 2018
yes, the last paragraph was really eye-opening; i never thought of that!
