Give five examples showing how different factors affect interest rate calculations
What will be an ideal response?
To determine the interest rate, one compares the interest paid with the amount borrowed: (1) The payback period is important. If you borrow $10,000 and repay that amount plus $1000 at the end of the year, the interest rate is 10% (i = $1000/$10,000 = 10%). (2) In some cases a lender will discount the interest payment at the time the loan is made, so the borrower would pay the $1000 interest in advance and receive the remaining $9000 for an 11% rate of interest (i = $1000/$9000 = 11%). (3) In other cases the financial institution uses a 360-day year instead of 365 days to calculate the interest rate, because it is simpler to calculate monthly rates (twelve 30-day months), but this does reduce interest paid. (4) If the loan is paid back in installments, the process becomes more complicated because on average the borrower had only half the loan for the full year (i = $1000/$5000 = 20%). (5) The compounding of interest also affects the calculation. If the interest payment is added on to the deposit as it is earned, then the new amount plus the interest payment earns interest. Compound interest on deposits is effectively more than simple interest. The more often the interest payment is made and compounded, the higher effective rate of interest will be.
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Excess reserves are the
A) amount of reserves held over what is desired. B) amount of reserves banks keep in their vaults. C) amount of reserves a bank holds at the Fed. D) amount of reserves the Fed requires banks to hold. E) same as the required reserves.
Which of the following is a characteristic of perfect competition?
a. homogeneous products b. many sellers c. many buyers d. all of the above
Which of the following about unemployment is true?
a. When a dynamic labor market is operating efficiently, mostly cyclical unemployment will be present. b. Some unemployment will be present even when a dynamic labor market is operating efficiently. c. When full employment is present, the rate of unemployment will be zero. d. When full employment is present, there will not be any frictional unemployment. e. When full employment is present, it will be impossible to sustain the current rate of output in the future.
Economic profit is the difference between
A. accounting profit and explicit costs. B. total revenue and the opportunity cost of all of the resources used in production. C. total revenue and the implicit costs of using owner-supplied resources. D. accounting profit and the opportunity cost of the market-supplied resources used by the firm.