Help with macroecon question!?
What is the interest rate at which you would be indifferent between receiving $1000 today and $100 every year forever.
Can someone answer this question and EXPLAIN how to find the answer please?
- Anonymous8 years agoFavorite Answer
To solve the case I have to ask you. What would you do if forever means for the rest of your life and it would be tomorrow? So in a lay man terms,no doubt, you would take the $1,000 today. But if you think about statistics, that Americans will live in average about 80 years. So in this case, you will take $100 every year for 80 years if the interest rate would less than 2.6%, because the present value of $8,000 will be $1,000 today.
In maths, you cannot solve two variables in one equation. So you have to make a big guess about your life.
- 8 years ago
well, 100 is 10 percent of 1000. so I suppose if the annual interest rate were 10%, then that should make you indifferent to receiving 1000 at once or 100 every year because you could potentially earn 100 in interest off the 1000 if was saved at that rate