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?

An individual holds a physical $50 banknote for one year. Match each economic scenario described below with the correct effect on the banknote's real purchasing power at the end of the year.

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?