Log in
Economics
1
answer
0
watching
261
views

Question#1: How will the real interest rate affect the cost of your car loan?

Let’s assume that the old clunker you have been driving needs $500 in repairs in order to pass an annual car inspection. You are considering buying a new car, and you contact car dealers and banks to determine the best deal you can get on a car loan. Assume two different scenarios: (a) The lowest interest rate you find on a five-year car loan is 10 percent, and the annual rate of inflation for the next five years will be 9 percent. (b) The lowest interest rate you can find on a five-year car loan is 6 percent, and the annual rate of inflation for the next five years will be 1 percent.

Question: Under which scenario—(a) or (b)—will you pay less, in real income, for your car loan?

Watch
1
answer
0
watching
261
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Paramjeet Chawla
Paramjeet ChawlaLv8
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Let’s assume that the old clunker you have been driving needs $500 in repairs in order to pass an annual car inspection. You are considering buying a new car, and you contact car dealers and banks to determine the best deal you can get on a car loan. Assume two different scenarios: (a) The lowest interest rate you find on a five-year car loan is 10 percent, and the annual rate of inflation for the next five years will be 9 percent. (b) The lowest interest rate you can find on a five-year car loan is 6 percent, and the annual rate of inflation for the next five years will be 1 percent.

Question: Discuss Under which scenario—(a) or (b)—will you pay less, in real income, for your car loan? and why?

Suppose that five car companies are considering borrowing $5,000 each to buy a new car assembly machine. If a company decides to buy the new machine, then they must borrow $5,000.

The annual real returns on these machines, also known as the value of the marginal product of capital, are shown in the table below. The value of the marginal product of capital is the revenue net of operating costs, taxes, and opportunity costs, but it does not account for the interest payment. Assume that the car assembly machines can always be resold at their original price.

Company value of the marginal product of capital (per year)
A $550
B $450
C $350
D $250
E $150

4.1. If the annual real interest rate on the loans is 6%, how many car companies will buy a new car assembly machine? Interest payments are made once a year.

A. Four companies
B. Zero companies
C. Five companies
D. Two companies
E. One company
F. Three companies

So what are the ethics involved with using numbers to make our point even when we know things could be seen differently if we presented it a bit differently? Remember, morals are what we know about right and wrong as individuals, ethics is the systems of formal and informal rules society adopts for the application of morals. (Example, most of us would agree that killing a human is morally wrong, however, the ethical system says it is okay to kill in self-defense, war, and some other situations.)

Yi really wants a car but her credit is pretty poor and she doesn't make much money. Both of those make a new car impossible for her. Instead, she finds a used car seller who offers credit to anyone and a no down payment deal. She knows that they are charging more for the car she wants than what she would pay if she bought it with cash from someone selling their own car but she can get credit. The deal sounds really good. The car is being sold for $9,995 with no money down. Unfortunately, her interest rate is going to be 18% for the five years she has the loan. By law, all of this has to be in the loan document but the salesperson will focus on the no money down, easy credit, and the $9,995 car is much cheaper than what she could get new.

Yet, just with simple interest calculations, Yi's monthly payment will be $253.81 and her total cost for the car will be $15,228.60.

If she simply saved that same payment for four months and put $1,000 down, she would likely qualify for a lower interest rate and could either get a lower monthly payment ($186.72) or she could buy a $13,000 car for the same monthly payment.

Is there a difference between what you're willing to present as ethical to a consumer versus what you would consider ethical if a salesperson did it to you? At what point do you feel unfairly manipulated by numbers? How much should we trust number-based evidence? How do we know we are being manipulated fairly or unfairly?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in