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There are 2 formulas to determine the value of money over time: Present Value & Future Value. 😲

Future Value: Value of money as interest accumulates over a specific period.

  • the formula: $X x (1+r)^n
  • X= the amount of money at the moment
  • r = real interest rate
  • n = time
  • it basically shows that money is worth more in the future
  • Example: If I put $150 in the bank, how much would it be worth in a year?

Present Value: Value of money at the moment versus if you got it in the future

  • the formula: $X / (1+r)^n
  • X = the amount of money at the moment
  • r = real interest rate
  • n = time
  • it basically shows that money could also be worth less in the future
  • Example: If I had $150 in a year, what would that be really worth today?

🤔Sometimes a problem might include the inflation rate. For this, you simply subtract it from the 1 + the interest rate: $X x (1 + r - ir) or $X / (1 + r - ir). (ir= inflation rate)

Let's go through some practice problems.🤠

🤷‍♀️Overall, understanding these formulas can be beneficial if you are trying to determine if you should take money now or in the future; however, I do not recall this concept being tested on the AP Macroeconomics exam, but it's always important to study just in case.

Hope this helped. Till next time rêveur. 


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