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Chapter 10 Study Guide

Chapter 10 Study Guide - Chapter Ten The Rate of Interest...

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Chapter Ten The Rate of Interest and its Significance I. Interest, Time Preference, and Market Rates a. Interest i. Has something to do with time. ii. Has something to do with money. iii. Sometimes mistakenly called “the price of money.” iv. Affects a businesses interest cost because they borrow for capital investments. v. Higher Rate of Interest 1. Ceteris paribus , makes capital investment more costly without affecting its benefits. a. Producers tend to retain production methods that are less capital-intensive. i. Any given amount of human labor and raw materials produces a smaller output of consumer goods. 2. Produces fewer material goods. b. Time preference: the foundation of interest. i. Time Preference 1. Individual’s preference, ceteris paribus, for “sooner” rather than “later.” 2. Ludwig von Mises and those sharing his view… a. Call it an axiom. b. Consider it a logical necessity. i. A person wouldn’t act at all if he didn’t prefer acting now over later. 3. Most economists… a. Embrace it as simply an empirically observed feature of nearly everyone’s behavior in most circumstances. 4. Egger: a. It is not only helpful, but necessary to an understanding of interest. 5. Time Preference Axiom a. Requires us to imagine the identical satisfaction to be available either sooner or later. b. Maintains that people will universally prefer to have it sooner. i. This is hard to imagine because the passage of time necessarily involves change of one sort or another. c. Asserts that every individual has time preference, but its strength differs among them.
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i. Individuals who strongly prefer sooner over later are said to have high time preference. 1. Timing of satisfaction means a great deal to them.
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