Why Is the Present Value of an Amount to Be

question 31

Multiple Choice

Why is the present value of an amount to be received (paid) in the future less than the future amount?

• A)Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.
• B)Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.
• C)Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.
• D)Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.
• E)None of the above is a correct answer.

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Definitions:

Economizing Behavior

The tendency of individuals or organizations to attempt to minimize costs or expenses and maximize value.

Scarce Resources

Limited natural resources that are not abundant enough to satisfy all the wants and needs of a population.

Human Choice

The decision-making process by individuals based on preferences, resources, and information available, emphasizing the role of decision in economic behavior.

Economic Policy

Strategies and actions taken by the government to manage its economic affairs, aiming at objectives like sustainable growth, high employment, and stable prices.