Preference for Higher-Return Assets over Cash for Long-Term Savings

Negative Real Rate of Return on Physical Currency

The Forgotten Banknote

An individual finds a $100 banknote that they had hidden away one year ago. During that year, the general level of prices for goods and services increased by 5%. Which statement best describes the situation regarding the $100 banknote?

Calculating Purchasing Power Loss

Evaluating Cash as a Savings Tool

Evaluating Cash as a Long-Term Store of Value

In an economy where the average price of goods and services increases by 2% over a year, a physical banknote will be able to purchase the same amount of goods and services at the end of the year as it could at the beginning.

A financial advisor explains that holding a large amount of physical cash for a long period is a poor strategy for preserving wealth. Which of the following statements provides the most accurate economic reasoning for this advice?

Two individuals, one in Country A and one in Country B, each decide to store a 100-unit banknote of their local currency under their mattress for one year. During that year, Country A experiences an annual price level increase of 3%, while Country B experiences an annual price level increase of 8%. Assuming neither banknote earns interest, which statement accurately describes the change in the real value of their money at the end of the year?

An individual holds a $20 banknote in a safe for four consecutive years. The annual increase in the general price level for each year is listed below. In which year did the $20 banknote experience the largest decrease in its real purchasing power?