Application: Interest Rates & Inflation

Question 1:  Which of the following instruments do you choose:

Question 2:  Which loan should carry a higher interest rate:

Question 3:  You want to buy a car.  Which option do you choose:

Question 4:  You want to buy a house and are offered a 20-year, fixed-rate mortgage at 4% interest per year.  A 10-year government bond currently pays 3.5% interest and inflation is running at 3% a year.  Is this a good deal?

Question 5:  You have the choice between two 1-year government bonds:  one pays interest of 3%, the other inflation-adjusted or real interest of 0.5%.  Inflation is currently 1% and expected to be stable.  Which do you choose?