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Money and Inflation

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Predictions of inflation or deflation can lead you to make completely different investment decisions. For example, if you think inflation will increase dramatically it is a good idea to invest in real estate. Your home will be worth a lot more in the future, and the amount you owe will shrink quickly as a result of inflation. On the other hand, if you think we will see deflation decrease then it is a good idea to keep a lot of your money in safer, cash-oriented investments as the dollar will actually be worth more in the future. So carefully consider your answer to the Case Assignment concerning inflation or deflation, and then write a two to three page paper explaining how your prediction of inflation or deflation will affect your personal investment decisions. Take into account any decisions regarding home ownership, refinancing a home, putting more money in a bank, or investing in the stock market. Feel free to consider other investment options as well.

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Solution Summary

The answer to this problem explains the effect of housing prices and home loans on inflation. The references related to the answer are also included.

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My prediction of inflation or deflation will affect my personal investment decisions. When there is inflation there is a sustained increase in prices for a broad range of goods. Inflation also means that there is a devaluation of currency. Investment in currency or currency equivalent is not a good investment option. If the demand and supply of goods remains the same inflation means the prices of goods will increase.

If I predict there will be inflation, I will invest in housing. Housing prices will rise because of inflation and because it is a leveraged asset. The down-payment is only between 20 and 30 percent of the housing. On the other hand inflation affects the price of the entire house. If inflation leads housing prices to double, the down-payment increases by six times. I will go in for a fixed rate mortgage; I will have to pay in dollars in future that have dropped in value. I will actually be paying less for the loan than when I took it out.

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Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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