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Lecture 7 - Econ 102 Fall 2006 Lecture 7 Fishers Theory of...

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1 Econ 102 Fall 2006 Lecture 7 Fisher’s Theory of Interest
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2 Main Questions What determines investment? What determines saving? What determines the interest rate?
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3 Main concepts Investment is determined by profit maximizing firms Saving is determined by utility maximizing households The interest rate equates the two
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4 Irving Fisher’s theory of interest Irving Fisher 1867- 1947 Developed theory of interest His work was based on previous Austrian theories
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5 Key Concepts Production: Income is a flow derived from a stock of capital By waiting and building capital more can be produced in the future Consumption: people prefer to consume early rather than late Interest is the price of not waiting
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6 Production possibilities Society has a stock of resources, physical plus human capital These resources yield a flow of income The income (and the resources themselves) can be consumed or invested (used to produce capital goods) Tomorrow’s stock of resources is what’s left after consumption
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7 Income and capital
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