The market interest rate is 5% and is expected to stay at that level. Consumers can borrow and lend all they want at this rate. Explain your choice in each of the following situations:
a. Would you prefer a $500 gift today or a $540 gift next year?
b. Would you prefer a $100 gift now or a $500 loan without interest for four years?
c. Would you prefer a $350 rebate on an $8000 car or one year of financing for the full price of the car at 0% interest?
d. You have just won a million-dollar lottery and will receive $50,000 a year for the next
20 years. How much is this worth to you today?
e. You win the “honest million” jackpot. You can have $1 million today or $60,000 per year for eternity (a right that can be passed on to your heirs). Which do you prefer?
f. In the past, adult children had to pay taxes on gifts over $10,000 from their parents, but parents could make interest-free loans to their children. Why did some people call this policy unfair? To whom were the rules unfair?