International Baccalaureate (IB) Practice Exam

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This principle suggests that a certain amount of money today has different buying power than the same amount of money in the future due to interest and inflation.

Interest rate
Time value of money
Inflation
Opportunity cost

The correct answer is: Time value of money

The principle that indicates a certain amount of money today has different buying power than the same amount in the future is known as the time value of money. This concept is foundational in finance and economics, asserting that money available now is worth more than the same quantity of money in the future due to its potential earning capacity. This is influenced by factors such as interest rates, which allow investments to grow over time, and inflation, which decreases the purchasing power of money. Understanding the time value of money is crucial for making informed financial decisions, whether one is considering saving, investing, or borrowing. It highlights why individuals should consider the future earning potential of their funds and the impact of inflation on future purchasing power. This principle is essential for evaluating cash flows and making comparisons across different time periods in financial analysis.