At Which Interest Rate Is the Present Value of $135

question 3

Multiple Choice

At which interest rate is the present value of $135.20 two years from today equal to $125 today?

• A) 2 percent
• B) 4 percent
• C) 6 percent
• D) 8 percent

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Definitions:

Crowding-Out Effect

The phenomenon where increased government spending leads to a reduction in private sector spending and investment due to higher interest rates or other factors.

Government Spending

The total amount of public expenditure by a government, including spending on defense, education, public infrastructure, and welfare programs.

Private Investment

The expenditure on capital goods by private sector firms or individuals in order to generate future income or profits, excluding government spending.

Crowding-In Effect

An increase in private sector spending stimulated by federal budget deficits financed by U.S. Treasury borrowing.