Steve Would Like to Buy a New Car but Must

question 10

Multiple Choice

Steve would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car. The current price of the car Steve wants to buy is $22,000, and the dealer expects the price of a similar new car to be $24,000 in two years. If Steve can earn an annual interest rate of 3% on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Steve purchases the car are $0. Please limit your considerations to the factors offered in the answer choices.

• A) Buy now because if Steve invests the $22,000 today it will only increase in value to $23,340, and this is less than the cost of his desired new car in two years.
• B) Steve is indifferent because his $22,000 investment will be worth exactly $24,000 after two years.
• C) Buy in two years because at $24,000 the car will cost less than the $24,385 Steve will have after investing the money for two years.
• D) Buy in two years because $24,000 is a real deal for the car Steve wants.

---

Definitions:

Seasonal Unemployment

Joblessness linked to seasonal variations in demand or supply of labor in certain industries.

Cyclical Unemployment

A type of unemployment that relates to the cyclical trends in the economy, fluctuating with the business cycle's contraction and expansion phases.

Automobile Industry

A sector of the economy focused on the manufacturing, design, marketing, and selling of motor vehicles.

Unemployment Rate

The share of the labor market that is unemployed and searching for a job actively.