Suppose the government spends $5,000 per person this year.The market for borrowing and lending is competitive,and the market interest rate is 6%.Which of the following plans to finance the government's spending is best for consumers?

Question

Quizplus · Accepted Answer

Each option effectively costs consumers the same when considering the time value of money and the 6% interest rate. Option A is a direct $5,000 payment. Option B is the future value of $5,000 one year later at 6% interest, which is $5,300. Option C represents the perpetuity formula where the payment ($300) is equal to the interest rate (6%) times the principal ($5,000), meaning the present value of paying $300 forever is also $5,000.

Suppose the Government Spends $5,000 Per Person This Year