A NOW Account Requires a Minimum Monthly Balance of $500

question 76

Multiple Choice

A NOW account requires a minimum monthly balance of $500 if annual interest of 5 percent is to be earned monthly on its deposits.An account holder has maintained an average balance of $300 for the first nine months of the year and $800 for the last three months of the year.She has written an average of 20 checks a month and is not charged for these services.However,it costs the bank $0.02 to process each check.

What is the average return (both explicit and implicit) earned by the account holder if the bank pays interest on only the amounts in excess of the required minimum of $200?

• A)2.01 percent.
• B)2.65 percent.
• C)3.78 percent.
• D)5.35 percent.

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Definitions:

Depreciation Expense

The allocated portion of the cost of a fixed asset, written off each year over the asset's useful life for accounting and tax purposes.

Scarcity

Occurs when the amount people desire exceeds the amount available at a zero price.

Choice

The act of selecting between two or more possibilities, often present in decision-making processes.

Economics

The study of how people use their scarce resources to satisfy their unlimited wants