Economics Homework Eleven Answers - Student Fourteen

Zachary C.

1. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason.

The money that was loaned could be put to better use in the time span that it is being loaned. For example it could be invested. Thus, in order for the loan to be profitable for both parties involved, interest must be payed.

Right, but note spelling: "paid", not "payed".

2. Suppose I loaned you $1000 today, and interest rates are 5% per year (compounded annually), and you repaid the loan plus interest in 2 years, then what is the total you would pay to satisfy this debt?

$1100

Not quite, because you overlooked compounding. The interest the second year is on the interest for the first year: $1000 times 1.05 and that total is then times another 1.05, to obtain $1102.50. (Minus 1)

4. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?

Time is money: this concept shows that the more time is put to good use, the more profitable the time will be.

Superb, could use as a model.

5. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.

First year: 1000+10%=$1100

Second year: 1100+10%=$1210

Total payment: $1210

No, you have to work backwards to a lower amount. $1000 in two years is the equivalent of a SMALLER amount today, because two years of time is worth something also. See model answer, and also note how compounding is done. (Minus 2)

47/50.--Andy Schlafly 21:50, 5 December 2009 (EST)