Thursday

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 27 of 36 Basic Tools of Finance
Section 4 of 16
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If you are given the choice of receiving $50 now or $100 in ten years, which should you accept?
Use the present value formula:
· if r is the interest rate
· then an amount X to be received in N years
· has a present value of X / (1 + r)ᴺ
· with an interest rate of 5%, the present value of $100 received in ten years is
· $100 / (1.05)¹⁰ = $61
So, you should choose to receive $100 in ten years, its present value is $61.
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In the previous section 3 one question was: would you choose to receive $100 today or $200 in 10 years?
The answer depends on the interest rate.
If the interest rate is 8 percent
· $200 in 10 years would have a present value of $93
· $200 / (1.08)¹⁰ = present value of $93
· in this case you should take the $100 today
Why does the interest rate matter for your choice?
The higher the interest rate the more you can earn by depositing your money in a bank.
…
The concept of present value helps explain why investment, thus the quantity of loanable funds demanded, declines when the interest rate rises.
Suppose you win a million-dollar lottery and are given a choice between
· $20,000 a year for 50 years totaling $1,000,000
· an immediate payment of $400,000
Which would you choose?
To make this choice, you must calculate the present value of a stream of payments.
Suppose the interest rate is 7%.
After doing 50 present value calculations and adding up the results you would learn the present value of this million-dollar prize is only $276,000
Here, you are better off choosing the immediate payment of $400,000.
To check at ChatGPT or any AI enter:
“If the current and predicted interest rate is 7%
If you receive $20,000 a year for 50 years
What is the present value of the sum?”
… …
deposit your money in a bank
ginkō ni anata no okane o azukeru
銀行にあなたのお金を預ける