Unit 9 Lenders and borrowers Flashcards
(17 cards)
Wealth
value of things that one owns that contribute to your wellbeing in some way, called assets
- debt is counted as negative wealth
- dep’n decreases wealth
- savings add to wealth
- income adds to wealth
Income
max amount you could spend in a given period without reducing your wealth
- includes earnings, profit, interests, dividends and rents, capital gains or losses, transfers from the gov minus taxes
Inter-temporal choice model
goods are consumption now and consumption later
How much can a person borrow if they have no money today?
endowment / (1 + r)
MRT of goods from the future to the present
(1 + r)
MRS of goods from the future to the present
(1 + p)
Consumption smoothing
preferring both some now and some later, rather than everything now and nothing later or vice versa
Situational impatience
Willing to give up more than a dollar in the future to get a dollar now
Intrinsic impatience
To determine intrinsic impatience, ask whether, if they initially had the same amount of good in both period, they would value having more of the good now than more of it later
- reasons for include myopia
- prudence - opportunity to consume the good in the future may not be available
Does a steeper IC imply more patience or impatience?
more impatient
Does a shallower IC imply more patience or impatience?
more patient
How to calculate discount rate (⍴)
absolute value of the slope of the IC minus 1
What is a discount rate (p)
tells us how much a person values the present over the future
- high: prefer things now
- low: willing to wait
Calculating fair price of annuity
Y1 = FV/(1 + r)
Y2 = FV/(1 + r)^2
Y3 = FV(1 + r)^3
…
Net income
Gross income - dep’n
Savings
Income not consumed
Investment
Expenditure on newly produced capital goods
