Unit 10 Flashcards
Borrowing and lending is a … relationship
Borrowing and lending is a principal agent relationship, in which the lender (the principal) cannot guarantee repayment of the loan by the borrower (the agent) by means of an enforceable contract.
What is collateral?
Collateral is an asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset.
What is money?
Money is a medium of exchange consisting of bank notes and bank deposits, or anything else that can be used tom purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose.
What is wealth?
Wealth is the stock of things owned or the value of that stock. It includes the market value of a home, car, any land, buildings, machinery or other capital goods that a person may own, and any financial assets such as shares or bonds. Debts are subtracted. Debts owed ton the individual are added. Wealth is a stop variable meaning that it is measured at a specific point in time.
What is income?
Income is the amount of money (profit, interest, rent, labour earnings, and other payments including transfers from the government) received, net of taxes paid, over a period of time such as a year. It is the maximum amount you could consume whilst leaving your wealth unchanged. It is a flow variable as it is measured over a set period of time.
What is depreciation?
Depreciation is defined as the loss in value of a form of wealth that occurs either through use ( wear and tear) or the passage of time (obsolescence).
What is net income?
Net income is gross income minus depreciation.
What is consumption?
Consumption (C) is defined as expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables.
What is saving?
When consumption expenditure is less than net income, saving takes place and wealth rises.
What is investment?
Investment (I) is the expenditure on newly produced capital goods ( machinery and equipment) and buildings, including new housing.
What is opportunity cost?
Opportunity cost is when taking an action implies forgoing the next best alternative action, this is the net benefit of the forgone alternative.
the interest rate is
The interest rate is the price of bringing some buying power forward in time.higher interest rate lessons the size of the feasible set.
one plus the interest rate ( 1+r )
1+r is the marginal rate of transformation of goods from the future to the present, because to have one unit of the good now, you have to give up 1=r goods in the future.
Explain the term, diminishing marginal returns to consumption.
Diminishing marginal returns to consumption is where the value of an additional unit of consumption declines, the more consumption the individual has.
What is consumption smoothing?
Consumption smoothing is the distribution of consumption evenly across periods.
What is pure impatience?
This is a characteristic of a person who values and additional unit of consumption now over an additional unit of consumption later, when the amount of consumption is the same now and later. It arises when a person is impatient to consume more now because they place less value on consumption in the future for reasons of myopia, weakness of will or other reasons.
What is Myopia?
Myopia (short-sightedness) is where people experience the present satisfaction of hunger or some other desire more strongly than they imagine the same satisfaction at a future date.
