ECO 304L Study Guide - Quiz Guide: Real Interest Rate, Budget Constraint, Opportunity Cost

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fuchsiareindeer237

14 Aug 2016

School

UT-Austin

Department

Economics

Course

ECO 304L

Professor

M O S T A S H A R I, S H A L A H

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Document Summary

The present value of a future amount of money given t years in the future and where that future value is in real (current) prices, then. 1( tr where fv is the amount offered in the future and r is the real interest rate and is assumed to be constant over the t years. If the future value is in nominal terms, then. 1( ti where fv is the amount offered in the future and i is the real interest rate and is assumed to be constant over the t years. Pv is smaller as r increases t increases. Fv is larger as r increases t increases. Present values are important for deriving the real firm and aggregate investment curves. In choosing whether or not to undertake an investment project, firms compare the up front costs (paid in the present) to the pv of the future stream of profits.

Related Questions

Present Value Calculator Application: A bank wants to show its customers how much they would need to invest to achieve a specified financial goal (future value) in 5, 10, 15, 20,25, and 30 years. users must provide their financial goal (the amount of money desired after a specified number of years has elapsed), an interest rate, and the length of the investment in years. Create an application that calculates and displays the principal (initial amount to invest) needed to achieve the user's financial goal. Your application should allow the user to invest money for 5, 10, 15, 20,25, or 30 years. For example, if a customer want to reach the financial goal of $15,000 over a period of 5 years when the interest rate is 6.6%, the customer would need to invest $10,896.96 as shown below.

The present value calculation formula is given as: where:

p if the amount needed to achieve the future value

r if the annual interest rate (for example 6.6% if equal to 0.066)

n if the number of years

a is the future-value amount.

pearmanatee588

If one country has a per capita income of $15, 000 and its economic growth rate is 5 percent per year, what will it's per capita income be in 10 years? About how many years will it take to catch up to a country where the per capita income is $30, 000 per year and the economic growth rate is 1 percent per year?

(Hint: Using annual compounding, future value = present value - (1 + rt), where r is the growth rate, t is the number of periods.)

pearturtle704

4. You're 20 years old, and you're trying to decide which career path to take based on the future expected streams of income. Occupation A has you earning $15,000 for 5 years, then $25,000 for the next 30 years. Occupation B has you earning only $1000 for 4 years, then $10,000 for 6 years, and finally $50,000 for the next 25 years. You plan to retire when you are 55.

a. Write out a formula to calculate the present value of each of these income streams, assuming the interest rate is r. [Hint: you donât have to write out all 35 terms, you can use when it is obvious what the next term is in a sequence.]

b. What occupation would be better if the interest rate was zero? If it was extremely high?

amberraccoon529

ECO 304L Study Guide - Quiz Guide: Real Interest Rate, Budget Constraint, Opportunity Cost

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