Alex wants to borrow $1,000 from Kara.If he repays the loan in one year,Kara would 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

Kara's preference for present consumption suggests that she would prefer to receive the money back sooner rather than later. Therefore, to compensate for the longer repayment period, Kara may charge a higher interest rate for the three-year loan compared to the one-year loan. Option D is not relevant as inflation is not mentioned in the question.

Alex Wants to Borrow $1,000 from Kara