### Growth Rate Applications

 True or False?Know equations on page 45 & 49 (of Jones Macro Econ Crisis Update Ed). You’ll almost certainly get a problem like this on your exam, just different numbers.              You have two options, which do you prefer?With a calculator: Option 1: --OR-- Option 2: Calculator Method 1)Assume you want the more valuable option and assume that you've memorized (for life) the equation on page 45, Now, which option is bigger?Option 1: Option 2: \$110  Option 1 is bigger. You’d prefer option 1 is preferred. True. Calculator Method 2)Alternatively, you can use the equation you know and love on page 49, calculate the ‘net-present value’ of option two. Option 1: Option 2: Worth \$110 in five years                  Clearly the \$100 today is better than the equivalent of \$86 today. You prefer option 1. True. Now – Without A CalculatorYou should be able to look at the options and know the first option is better. Say you get option 1, you get \$100 today, at 5% interest. Year 1) If you wanted to, you could put that cash in the bank, this year you’d earn 5%, or an extra \$5 for a total of \$105. Year 2) Next year, you’d earn 5% on your \$105. So you’d earn over \$5. You’re balance now more than \$110.Year 3) The following year (year 3), you’d earn another 5% on that +\$110. So, with compound interest you’d have Over \$115 in the bank. Year 4) ...and so on...Year 5) After 5 years you can assume you’d have over \$125. ~In fact! If your options where Option 1: Today: \$100 at 5% or Option 2: In Five Years \$125 – You should know that option 1 gives you compound interest; delivering in five years over \$125.   Making it clear Option 1 is the better of the two options.   -----TRUE!