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for Outline Chapter 15 question #1 Jones deposited $1,000 in a savings bank account and received 5 percent interest annually. Three years later Jones withdrew this deposit plus the accrued interest. During that same period, the cost of living rose 20 percent. (A) In terms of the bank deposit, how did the events of the three-year period affect Jones? Explain. (B) How might Jones have invested the $1,000 more profitably? When Jones withdrew his deposit with the accrued interest, he would have received $1157.62. However, the cost of living has increased by 20 percent which totals to $1200. As a result, Jones has "lost" money because the cost of living has increased at a higher rate then the return he earned from his deposit. Jones has lost money because now it would take $1200 to buy as much as $1000 would three years ago. During inflationary times, people with surplus funds frequently look for investments that will increase in value as fast as or faster than the cost of living. This way, the return they earn will have greater purchasing power then if they had invested in a bank account with an interest rate lower then the rate of inflation. Jones could have invested his $1000 more profitably in CDs, Savings account, stocks and on retirement. These alternate investments usually yield a return that has a higher rate of interest the then rate of inflation. A CD is a certificate of deposit. A CD offers a significantly higher rate of return than that of a regular savings account but it can tie up your money for a certain period of time, from three to five months. Also, it requires a minimum deposit, usually starting at $500. There are also long term beneficial investments. Individual Retirement Accounts and Keogh plans. Employed people can set aside an amount of funds in special IRA and Keogh plans until they are eligible to withdraw these savings. Money put into IRAS and Keogh plans can be deducted from one's income, and taxes on that amount and on the interest earned by the account need not be paid until the benefits withdrawn. Jones can invest his money in the stocks of publicly held corporations. Many of these stocks yield a return in the form of dividends. Investors may receive a capital gain if the value of their stocks should increase over the years. Lastly, property is an excellent way to invest. Buildings, land, jewelry, and works of art all have value. People who invest a portion of their savings in property, hope that their investments will provide a hedge against inflation. An inflation hedge is an investment that is likely to increase in value during times of inflation and thereby offset its effects on savings and real income.

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