# Chap010 - Chapter 10 - Choices Involving Time Modeling...

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Chapter 10 - Choices Involving Time Modeling Decisions: four issues Chapter 10: Choices Involving Time Main Concepts and Learning Objectives This chapter focuses on the time value of money and decisions by firms and households to shift resources between the present and future by borrowing and saving. Implications of these savings and investment decisions are also discussed. Students who master the material presented in this chapter will be able to: Compute the interest earned on an investment, with an interest rate of r. Compute present value Compute internal rate of return Use budget lines and indifference curves to analyze tradeoffs between current and future consumption. Multiple Choice Quiz (10 questions) covering main points: 1. If you deposit \$100 in the bank account with an interest rate equal to 5%, how much interest will you earn in the first year? a. \$0.05 b. \$0.50 c. \$5.00 d. \$50.00 2. If you deposit \$100 in the bank account with an interest rate equal to 5%, how much interest will you earn in the second year? Assume that you will leave both the initial deposit and the first year’s interest in the account. a. \$.0525 b. \$.50 c. \$5.25 d. \$.525 3. Equation 5 provides a widely-used formula. This formula is useful when a. each of the future payments is the same (such as 60 car loan payments with each payment equal to \$200) b. the transaction is a loan; this cannot be used for investments c. Both a and b d. None of the above 10-1

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Chapter 10 - Choices Involving Time 4. Assume that Sally has agreed (in writing) to pay you \$1000 per year for the next 20 years. As interest rates fall, the present discounted value of these payments will: a. increase b. decrease c. stay the same 5. Which of the following is true? a. Nominal interest measures purchasing power (because it has been adjusted for inflation). b. Real interest measures purchasing power (because it has been adjusted for inflation). 6. The formula: real interest rate = nominal rate - inflation a. is 100% accurate b. is an approximation that is widely used as a rough computation, but it is not 100% accurate 7. If Vera Olds used the \$23.04 million lottery payment to buy treasury bonds, would she receive the same annual payments as if she had decided to take her lottery prize in annual installments? a. yes b. no 8. Sally is making a decision between consuming goods now and consuming goods one year from now. The slope of her budget line is determined by a. her preferences b. the interest rate c. the characteristics of the two goods 9. How does an increase in the interest rate affect student decisions to invest in human capital by earning a graduate degree? Assume the cost of earning the two year degree, including opportunity costs, is \$100,000. This degree will boost annual earnings by \$30,000 per year. a.
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## This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.

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Chap010 - Chapter 10 - Choices Involving Time Modeling...

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