- This question is about money, “economic anthropology” and “forensic economics.” In other words, CSI meets Indiana Jones meets Jerome Powell (the current Federal Reserve Chairman).
. (a) If you were to travel to a newly discovered civilization deep in the heart of the Amazon. How could you tell whether or not this civilization had an economy based on money?
(b) Suppose you discovered that this civilization was engaged in barter, how would you convince them that using ducks as a form of money would improve their lives?
(c) Suppose you discovered another Amazonian civilization that actually did use ducks as money. Should they switch to something else (like M&Ms or gambling chips)? Why or why not?
- “Present achieve” is considered to be one of the most important concepts ever articulated in financial economics. We use it to calculate our current wealth or the value of all our assets.
- As a practical matter, how do you calculate the present value of (0 a single future payment? (ii) two future payments received on separate dates? (iii) future payments received forever but only in even-numbered years? Write down the
formula you would use to calculate the present values and explain all parts of the formulas.
- Do lotteries mislead a gullible public? When lotteries talk about winning a million dollars, they usually do not mention the fine print that most of the prize money is in the future. A winning lottery ticket is equivalent to a security that pays out the million dollar prize in equal installments over a ten (or thirty) year period, or else you can choose a much much smaller one time lump-sum payout.
- What (roughly) is the present value of holding a winning lottery ticket that pays out over ten years? Specifically, explain what formula would you use to compute the value.
- How does the present value change when interest rates rise?
- What happens to the present value when the payments are stretched out over thirty years instead of ten?
- Under what circumstances, should you choose the lump-sum payout instead of the installment plan?
