Economics 20th Edition by Campbell McConnell ,Stanley Brue ,Sean Flynn

Exercise 4

Angela owes $500 on a credit card and $2,000 on a student The credit card has a 15 percent annual interest rate and the student has a 7 percent annual interest rate. Her sense of aversion makes her more anxious about the larger As a result, she plans to pay it off first-despite the fact that professional financial advisors always tell people to pay off their highest-interest-rate first. Suppose Angela has only $500 at the present time to help pay down her and that this $500 will be the only money she will have for making debt payments for at least the next year. If she uses the $500 to pay off the credit card, how much interest will accrue on the other over the coming year? On the other hand, if she uses the $500 to pay off part of the student how much in combined interest will she owe over the next year on the remaining balances on the two By how many dollars will she be better off if she uses the $500 to completely pay off the credit card rather than partly paying down the student (Hint: If you owe X dollars at an annual interest rate of Y percent, your annual interest payment will be X × Y , where the interest rate Y is expressed as a decimal.)