Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 18, Problem 13DQ
To determine
Interest rate.
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Assume that you borrow $5,000, and you pay back the $5,000 plus $250 in interest at the end of the year. Assuming no inflation, what is the real interest rate? What would the interest rate be if the $250 of interest had been discounted at the time the loan was made? What would the interest rate be if you were required to repay the loan in 12 equal monthly installments?
is based on the notion that a dollar paid in the future is less valuable than a dollar paid today.
The present value of a loan in which $1000 is to be paid out a year from today with the interest rate equal to 1% is $. (Round your response to the neareast two decimal place)
If a loan is paid after two years, and the amount $1000 is to be paid then with a corresponding 2% interest rate, the present value of the loan is $. (Round your response to the neareast two decimal place)
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Suppose that you earn $320 in year 1 and will ean $720 in year 2. If you borrow money against your future income you will have and additional $576 to
spend in year 1, and if you lend all of your current income you will have and additional $400 to spend in year 2. In both years you consume only food which
costs $1 per kilogram in each year.
What is the interest rate that you borrow and lend at?
R=
Let your MRS for food in year 1 with food in year 2 be given by the formula
where F is the amount of food consumed this year and F is the amount
of food consumed next year.
Calculate your consumption bundle:
F =
F =
Suppose the interest rate at which you can borrow and lend changes to 20%.
Calculate your new consumption bundle:
F =
F2 =
Which interest rate is preferred?
The initial interest rate found in part 1
O The new interest rate, 20%
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