10-20-09 - ECONOMICS 100B Professor Martha Olney 10/20/09...

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ECONOMICS 100B Professor Martha Olney 10/20/09 Lecture 16 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Outline S=I Algebra and Calculus Assets, Liabilities, Money Quantity Theory of Money Hello. The outline is on the board. So as you have been working through the problem set, you’ll see that we have been looking at how changes in components of savings and investments affect interest rates in the long-run. Why do we care about long-run interest rates? Beginning on Thursday, we will begin looking at the yield curve. The yield curve shows different interest rates at a moment in time. For example, as of October 9, 2009, what is the interest rate on a three-month treasury bill, a six-month treasury bill, a ten-year treasury bond? In general, the long-term interest rate on thirty-year bond is an average of today’s short-term rates and our expectations of short-term rates over time. Since our expectations of interest rates in the long-run affect interest rates today, it is worthwhile to think about what forces push interest rates up and down in the long-run. We saw that increases in savings tend to push down interest rates. Increases in investment tend to push up interest rates. If we have policies that give us persistent changes in household, government, and foreign savings or investment, this will give us a clue about where interest rates are headed over time. This then affects today’s interest rates. S=I Algebra and Calculus Now we will move beyond the fundamental of Economics 1 and look at the calculus and algebraic derivation behind our equations. First, we will find an expression for the interest rates. We can figure our equilibrium interest rates by using either S=I or Y=AD. Remember the following equations that we derived beforehand. ܥൌܥ ൅ܥ ൈܻ ܻ ൌܻെ ሾܶ ൅ ݐܻሿ ൌ ሺ1െݐሻܻെܶ ܫൌܫ െܫ ݎ ܩൌܩ ܩܺ ൌ ܺ ൅ܺ ܻ ൅ܺ ߝ ݓ݄݁ݎ݁ ߝ ൌ ߝ െߝ ሺݎ െ ݎ ܩܺ ൌ ܺ ൅ܺ ܻ ൅ܺ ߝ െܺ ߝ ݎ൅ܺ ߝ ݎ ܫܯ ൌ ܫܯ ܻ ݅݊ ݁ݍݑ݈ܾ݅݅ݎ݅ݑ݉: ܻ ൌ ܣܦ ՞ ܵ ൌ ܫ Now with these equations in mind, we will find an expression that tells us what is, the real interest rate.
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Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 10/20/09 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
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This note was uploaded on 02/04/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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10-20-09 - ECONOMICS 100B Professor Martha Olney 10/20/09...

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