Which of the Following Statements Concerning the Effective Annual Rate

question 17

Multiple Choice

Which of the following statements concerning the effective annual rate are correct?
I. When making financial decisions,you should compare effective annual rates rather than annual percentage rates.
II. The more frequently interest is compounded,the higher the effective annual rate.
III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.
IV. When borrowing and choosing which loan to accept,you should select the offer with the highest effective annual rate.

• A) I and II only
• B) I and IV only
• C) I, II, and III only
• D) II, III, and IV only
• E) I, II, III, and IV

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Definitions:

Negatively Sloped

Refers to a downward inclination of a line or curve on a graph, indicating an inverse relationship between two variables.

Total Surplus

The total net benefit to society from the production and consumption of a good, equal to the sum of consumer surplus and producer surplus.

Consumer Surplus

The deviation between the full cost that consumers are willing and are financially suitable to pay for a product or service, and the cost they ultimately pay.

Individual Consumer Surplus

The net gain to an individual buyer from the purchase of a good; equal to the difference between the buyer’s willingness to pay and the price paid.