Mathematics ACT Aspire Practice Test

What does simple interest represent?

1. The total price after taxes

2. The amount earned or paid for using borrowed money

3. The value of an asset

4. The annual salary

The correct answer is: The amount earned or paid for using borrowed money

Simple interest represents the amount earned or paid for using borrowed money over a specific period. It is calculated using the formula \( I = P \times r \times t \), where \( I \) is the interest, \( P \) is the principal amount (the initial sum of money), \( r \) is the interest rate, and \( t \) is the time the money is borrowed or invested, typically measured in years. This concept is crucial in finance as it helps individuals and businesses understand the cost of borrowing or the return on investments. Unlike other forms of interest, simple interest is not compounded, meaning it does not grow on previously earned interest, which simplifies calculations and understanding of how much will be paid or earned over time. Therefore, it directly reflects the cost or earnings related to the use of money in a straightforward manner. In contrast, the other options represent different financial concepts. Total price after taxes pertains to the final cost of a purchase after sales tax is added. The value of an asset is connected to its market worth or potential to generate income. Annual salary refers to the total compensation received for employment, which does not specifically relate to the use of borrowed money.