New Chapter Interest Rates-Extra that you pay when you borrow/Extra that you get when you lend When you loan $300 @ 4% - After 1 year on an annual loan you pay $300 + (300x.04)=$312 Real vs. Nominal Nominal- Money return Real- goods able to be purchased with return Now Rate Next year Money $100 Nominal=10% $110 Prices 10/good Inflation =2% $10.20/good Goods(qty) 10 Real Rate=8% 10.8 Nominal Interest rate= Real rate + Inflation rate Market for Loanable Funds- we will use real interest rate this chapter Demand Who invests? Firms. They invest in Physical capital, Human capital and technology Firm investment decision making Why?- increase profits!!! Lots of options Not all investments are equally profitable Investments are financed= expensive to borrow Invest in all projects that increase profits including covering the interest cost Marginal investments will turn from profitable to costly if interest rates go too high Supply- Banks are an intermediary(matchmaker) between Firms(demander) and the 3 suppliers Suppliers are Households Private savings=Income - taxes - consumption Income-taxes= disposable income Interest is peoples incentive to invest As Real interest rates rise people save more, but firms don’t invest as much Foreigners Government
New Chapter Interest Rates-Extra that you pay when you borrow/Extra that you get when you lend When you loan $300 @ 4% - After 1 year on an annual loan you pay $300 + (300x.04)=$312 Real vs. Nominal Nominal- Money return Real- goods able to be purchased with return Now Rate Next year Money $100 Nominal=10% $110 Prices 10/good Inflation =2% $10.20/good Goods(qty) 10 Real Rate=8% 10.8 Nominal Interest rate= Real rate + Inflation rate Market for Loanable Funds- we will use real interest rate this chapter Demand Who invests? Firms. They invest in Physical capital, Human capital and technology Firm investment decision making Why?- increase profits!!! Lots of options Not all investments are equally profitable Investments are financed= expensive to borrow Invest in all projects that increase profits including covering the interest cost Marginal investments will turn from profitable to costly if interest rates go too high Supply- Banks are an intermediary(matchmaker) between Firms(demander) and the 3 suppliers Suppliers are Households Private savings=Income - taxes - consumption Income-taxes= disposable income Interest is peoples incentive to invest As Real interest rates rise people save more, but firms don’t invest as much Foreigners Government
Econ%201A%20Notes%20Exam%201.docx