AP Microeconomics : AP Challenge Questions B Quiz

*Theme/Title: AP Challenge Questions B
* Description/Instructions
When consumers have to decide whether to save or consume, they have to compare two time periods when the costs and benefits arrive at different times. For example, when a student wants to take a loan for college, she receives all of the benefits now, but the costs come later. To see equate the costs and benefits of different time periods, economists use present value. The present value is equal to: PV = 1/(I + i )^n where i is the interest rate and n is the number of periods. So the present value of a $1 one year from today is equal to $0.91 when the interest rate is 10%. The present value of a dollar two years from today is $.83 at the same interest rate. A business will acquire a loan in the Loanable funds market when the return on investment is greater than the interest rate. So if a business venture returns 5% and the firm can borrow at 3%, the firm will borrow the funds. For this reason, the curve for Loanable funds is negative. Borrowers will supply more Loanable funds at higher interest rates. For this reason the supply of Loanable funds is positive. Efficiency requires that resources are used up to their opportunity cost. If a resource is employed in the production of a good above its opportunity cost, then economists say that the resource has economic rent.

Group: AP Microeconomics AP Microeconomics Quizzes
Topic: AP Microeconomics

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