Answer A is incorrect. Please help me Suppose you have $100 to invest. You can hold it incash, you can deposit it in some savings account thatpays a nominal interest rate of 0.5%, or you caninvest in physical capital. The real rate of return oncapital is 1%. The inflation rate is -1%. The threeoptions are risk free. The optimal decision is to:hold some cash and invest the rest in capitalinvest the $100 in physical capitaldeposit the $100 in the savings accounthold the 100$ in cash

Here, three options are available to invest $100. This $100 can be kept as cash, in savings account or in physical capital based on different interest rate.According to the given information, it can be said that if an individual is keeping $100 in cash, the value of $100 will increase by 1% as inflation rate is -1%, which implies that the inflation decreases by 1%. If an individual is investing in savings account, the value of $100 will increase by 0.5% as it includes real interest rate and inflation rate. While, if an individual is investing in physical capital, the value of $100 will increase by 2% such that 1% of real rate of return and 1%of a decrease in inflation rate. As a result, the optimal decision is to invest $100 in physical capital as it gives highest returns among three options. Hence, the correct option is: b. invest the $100 in physical capital