Absolutely! What with BB’s use of the Mr Moneybags character, I was expecting this to be a quiz to assess the general knowledge in the population about how Capitalism really works. Most disappointing.
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The test boils down to:
Ugh! Guise! You should be able to tell what we mean!!! Stupid foreigners!
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That was my first thought, but then I noticed that it doesn’t say anything about interest in that particular question - just a straight comparison.
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President Reagan: Bye bye! [ Girl Scout exits Oval Office ] Okay, back to work! [ staff re-enters ] Afghanistan needs more money. We’ve got $65.2 million tucked away in Zurich. Now, if we hold it there for another 30 days, at 7.28% interest, that’s… roughly… $400,000.
Staffer #1: [ with calculator ] $397,200…
President Reagan: … and 85! I know! Don’t waste my time! But… if we take out only $20 million, we lose… let’s see, let’s see… that’s…
Staffer #1: $121,800…
President Reagan: and 16! Thank you so much! [ intercom buzzes ] Yes?
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you don’t have to calculate it if you look at the answer choices. if it were simple interest then the sum of five years interest plus the principal would be exactly $150, so less than $150 is a non-starter. the premise of the question is that the interest is being compounded, that is added at the end of each year with the interest of the previous years drawing interest going forward, then it would have to be greater than $150. you don’t have to know how much the compounded interest is to realize that.
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…for some values of I. Not always. Not even usually, I’ll wager, but the calculation there is very complex.
It’s 10%, so you just shift the decimal place over and add:
100+10 = 110
110+11 = 121
121+12.1=133.1
133.1+13.31=146.41
146.41+14.641=161.051
Not that I would expect people to be able to do more than the first 2 or 3 steps of that in their head either.
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I always seem to take not optimized routs to the answer it seems.
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If the test demands a freeform answer 161.051 is non-obvious without a calculator. But if the test simply requires a multiple choice between
- less than 150,
- 150
- greater than 150,
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the answer is pretty obvious, assuming that you answered Q4 correctly.
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That would be a bank located in the 2nd question about inflation . . . for example after the Fed kept interest rates too low for too long, and inflation has doubled prices in 10 years (or less), such that they’ve had to tighten repeatedly to try and reign it in, with not much luck. See what Paul Volcker did in the late 1970s.
Even if the math technically works as stated, the simple answer to #2 indicates poor financial thinking.
Never mind that wages have been stagnant almost half a century, let’s assume a fantasy world where they did magically keep up with inflation.
If you’re young and live at home with your parents, 10 years from now you may have to pay rent, utilities, etc., and possibly have one or more expensive children. If you’re going to college, 10 years from now you’ll be paying back student loans. If you’re older, 10 years later you will most likely need more health care. Regardless of age, things that didn’t exist before will have become necessities in the practical sense. Remember when we didn’t have cellphone or cable internet bills? There was a time just a few generations ago when people didn’t need appliances or make car payments.
So you might technically be able to buy the same as you can today, but you will probably need more.
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Less, because a bank that is forced to offer 15% interest to all comers exists in an economy so far outside of the safe zone that it will probably fold before the end of the second year. In such a situation, stockpile durable goods in your garage and canned food in all other rooms of your house.
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Where does it say you have to calculate the compound interest in your head?
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For 1) the question is about risk not investment performance, for the others these are not real world examples, they are just tests to see how well people understand basic financial concepts.
- Is it safe to put all your eggs in one basket? - asked the knight to the knave
- The answer depends on the state of your wealth at both points in time, not your income. Ceteris parabus to the parameters stated in the question, duh. Also, the variability of inflation rates across the basket of goods you regularly purchase now is high, and will be in future, plus that basket will change its contents over time.
- This is dependent on the periodicity of the interest charge of 3% and duration of the loan.
- The answer depends on the terms of the savings agreement. Read the small print. The preamble indicates compounding, so on that basis, duh. More.
- See answer to 4. Within the parameters, 161.051. But you wouldn’t see the 0.001 - that’s rounding. The bank keeps it. Multiply by 10m accounts, and you pay for 1/4 of a 40k clerk. Look after the pennies, and the pounds look after themselves.
The thing with questions is - they have to be perfectly stated. These are loose and confusing.
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“The United States didn’t make even the top 10”
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LOL. I stand corrected, although if you’ll allow me to move the goalposts a little, every nation is foreign to the financial world.
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I lost interest before I got that far.
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I remember asking my software engineer buddies what is the formula was for compound interest, 20 years ago. The most common answer was “I have an HP financial calculator that has a button for that”. Today the proper answer would be “use a web calculator”. Having that question on the test reflects a lack of real world financial literacy.
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I learned the formula in grade… Oh dear heavens, probably 10? After a multi-year gap I needed to look it up again and tried searching for “compound interest formula.” What I got was an absolute flood of online calculators. I swear, took me a good ten minutes to find the actual formula.
Mind you, that was before Wolfram Alpha.
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