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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 10 percent, then the present value of $100 to be paid in 2 years is

a. $80.

b. $83.

c. $120.

d. $121.

To determine

Calculation of the present value of money.

Explanation

Option (b):

The present value can be calculated as follows:

Present value=Future value(1+Interest)Time period83=100(1+0.1)283=1001.218382.64

The calculated value is nearly equal to 83. Thus, the option “b” is correct.

Option (a):

The present value can be calculated as follows:

Present value=Future value(1+Interest)Time period80=100(1+0.1)280=1001.2180<82.64

The calculated value is greater than 80. Thus, the option “a” is incorrect

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