Question

4. If interest rates are at a level of 1% and expected inflation is 2%, would you prefer saving or spending your money?

Answer 1

When the interest rate is at 1% and the inflation is at 2%. This implies that the inflation is low and the interest rate is low. According to the consumption CAPM during high interest rates it is wise for an investor to consume less and invest more. The opposite is true, during low interest rates it's wise for an investor to consume during this time. I'd prefer spending my money during this period.

Answer 2

If interest rates are at 1% and inflation is expected to rise at 2%, then money invested would lose real value at the differential rate of 1%. Therefore, such an investment would not likely be wise. Of course, that does not mean that spending all of the money right away would be a sound alternative. Instead, a wise investor would be likely to pursue other more flexible, higher-return investment vehicles, or to still simply save the money until the investment climate becomes more favorable.