econ. review #2 - Econ Review#2 INTEREST nominal in current...

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Econ. Review #2 INTEREST nominal – in current $ real – adjusted for changing $ power o r = [(1+i) / (1+ )] – 1 π approximately i- …only works if i and are small numbers π π Time Value of Money o one dollar today is BETTER than one dollar tomorrow (you can save it today and get more interest) Formula for Present Value…what present value is now for an amount you want in the future o PV = $X the money you expect t periods from now (1+i) t X – future payments (after t years) t – years from now I – nominal interest rate (always positive) Geometric Series a (r m – r n+1 ) a – amount you receive every year (1-r) m – first year n – last year model – simplified version of the world, misses a lot of components of real world classical model output determination and economy-wide equilibrium o used to study macroeconomic phenomena (growth and business cycle) o key building blocks: closed economy , no imports or exports agents firms and households agents interact via 3 markets: goods market (GM) – where firms sell their output to households (consumption goods) and other firms (investment goods) labor market (LM) – where household save funds for interest, and firms seek funds to finance investment projects
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Econ. Review #2
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