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Maximizing Future Value: The Importance of Discount Rates in Economic Trade-offs

Explore the crucial trade-offs between present and future values in economics. Discover how discount rates impact decision-making with a $1000 loan example. Determine the smallest acceptable repayment amount after one year. Learn the significance of discount rates ranging from 0% to 10%. Understand how discount rates influence growth and welfare considerations.

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Maximizing Future Value: The Importance of Discount Rates in Economic Trade-offs

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  1. Ch. 5: Trade-offs and the Economy

  2. Trade-offs Between Present and Future

  3. What is the smallest amount you would accept as repayment in one year for a $1000 loan to me today?

  4. FV = PV(1+R) FV = 1000(1+R) Plug in the amount you would accept in one year as your future value (FV) and solve for R to find your discount rate.

  5. As low as zero percent

  6. 10 percent

  7. 2 to 8 percent

  8. 3, 7, 10 percent

  9. 2 to 7 percent

  10. <2 to near 7 percent

  11. The Choice of Discount Rate Matters!

  12. Growth vs. Welfare

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