Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
13 Cards in this Set
- Front
- Back
|
RISK PREMIUM
|
(1 + r )=(1 + rrisk free )(1 +ρ), ρ is called the risk premium
|
|
|
real interest rate
|
(1 + r )=(amount returned) /(amount lent)
|
|
|
THE NOMINAL INTEREST RATE is
|
(1 + i)= (Payment on the Loan) / (Value of the Loan)
|
|
|
Payment on the Loan =
|
(# goods sold)*(Priceof good)
|
|
|
Value of the Loan =
|
(#goods bought)*(price of good)
|
|
|
Consumption
|
C(t) = R(t) − I(t) if t>T
and C(t) = R(t) − I(t) − (Seeds used to pay loan and interest)(t), if t=T Ct = consumption in year t Rt = return in year t It = interest in year t |
|
|
three sources of fluctuation for the nominal interest rate.
|
(1 + i)= (1 +πs )(1 + rrf )(1 +ρ)
r = real interest rate (flux) πs = product inflation ρ = risk |
|
|
For small countries with relatively low inflation rates, how is real interest rate related to the nominal interest rate and inflation.
|
r ≈ i − π, where
i = nominal interst, r = real interest, π = inflation rate ref. Fisher Effect |
|
|
how does nominal interest behave in the long, medium and short terms?
|
In the long run inflation is equal to the growth rate of money minus the normal growth rate.
Hence, in the medium term i ≈ rn + gm − gy but in the short term e i ≈ r +π |
|
|
FISHER EFFECT.
|
The hypothesis that in the long term, the nominal interest rate increases with the inflation rate.
|
|
|
Equilibrium in the goods market was represented by the IS curve.
|
Y = A(Y , r) + A and in the medium term Y=Yn, hence there is, for every set of parameters of function A (marginal propensity to consume, sensitivity of investment to the interest rate) and for every level of autonomous spending (government spending) a NATURAL REAL INTEREST RATE rn .
|
|
|
PRESENT DISCOUNTED VALUE (PDV).
|
x_t = return flow at year t {x_t E t=0…..n} K = investment during first period
PDV = x_0 + SUM[x_t /(Prod(1+i_T,from T=1 to T=t))] - K |
|
|
Assuming a constant interest rate ( i ) and return rate (x) yields PDV of :
|
PDV = x + x/i - K
|
