Alex wants to borrow $1,000 from Kara. If he repays the loan in one year, Kara will require him to pay 5 percent interest on the loan. If Alex wants to repay the loan over three years, but Kara
Strongly prefers present to future consumption, we would expect the interest rate on a three-year
Loan to be

Question

Quizplus · Accepted Answer

If Kara strongly prefers present to future consumption, which means she values money more highly today than in the future, she would want a higher interest rate for a longer loan repayment period. This is because she would want to be compensated for waiting for a longer period to receive her money back. Therefore, the interest rate on a three-year loan is expected to be greater than for a one-year loan, making choice (B) the best answer.

Alex Wants to Borrow $1,000 from Kara