AP Macroeconomics
MODULE 24 REVIEW
Check Your Understanding
1. Consider the three hypothetical projects shown above. This time, however, suppose that the interest rate is only 2%.
a. Calculate the net present values of the three projects. Which one is now preferred?
b. Explain why the preferred choice is different with a 2% interest rate from with a 10% interest rate.
Tackle the Test: Multiple-Choice Questions
1. Suppose, for simplicity, that a bank uses a single interest rate for loans and deposits, there is no inflation, and all
unspent money is deposited in the bank. The interest rate measures which of the following?
I. the cost of using a dollar today rather than a year from now
II. the benefit of delaying the use of a dollar from today until a year from now
III. the price of borrowing money calculated as a percentage of the amount borrowed
a. I only
b. II only
c. III only
d. I and II only
e. I, II and III
2. If the interest rate is zero, then the present value of a dollar received at the end of the year is
a. more than $1.
b. equal to $1.
c. less than $1.
d. zero.
e. infinite.
3. If the interest rate is 10%, the present value of $1 paid to you one year from now is
a. $0.
b. $0.89.
c. $0.91.
d. $1.
e. more than $1.
4. If the interest rate is 5%, the amount received one year from now as a result of lending $100 today is
a. $90.
b. $95.
c. $100.
d. $105.
e. $110.
5. What is the present value of $100 realized two years from now if the interest rate is 10%?
a. $80
b. $83
c. $90
d. $100
e. $110
Tackle the Test: Free-Response Questions (answer in the space provided)
1.
a. Calculate the net present value of each of the three hypothetical projects described below. Assume the
interest rate is 5%.
Project A: You receive an immediate payoff of $1,000.
Project B: You pay $100 today in order to receive $1,200 a year from now.
Project C: You receive $1,200 today but must pay $200 one year from now.
b. Which of the three projects would you choose to undertake based on your net present value
calculations? Explain
2.
a. What is the amount you will receive in three years if you loan $1,000 at 5% interest?
b. What is the present value of $1,000 received in three years if the interest rate is 5%?