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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

If the interest rate is zero, then $100 to be paid in 10 years has a present value that is

a. less than $100.

b. exactly $100.

c. more than $100.

d. indeterminate.

To determine

Calculation of present value of money.

Answer

Option “b” is correct.

Explanation

Option (b):

Present value of money can be calculated as follows.

Present value=Future value(1+Interest)Time period100=100(1+0)10100=1001100=100

Thus, the option “b” is correct.

Option (a):

The present value would be less than $100 if the interest rate is positive. Thus, the option ‘a’ is incorrect.

Option (c):

The present value is greater than $100, if the interest rate is negative. Thus, the option “c” is incorrect.

Option (d):

The present value can be determined by using future value, interest rate, and the time period. Thus, the option “d” is incorrect.

Concept

Concept introduction:

Present value: Thepresent value refers to the today’s value of the future amount that adjusted with the existing interest rate.

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