Lecture+3a - Lecture 3 Background Material Prof. Paczkowski...

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Lecture 3 Background Material Prof. Paczkowski Lecture 3 Background Material Prof. Paczkowski Rutgers University Spring, 2010 Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 1 / 78
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Lecture 3 Background Material Prof. Paczkowski Introduction Part I Introduction Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 2 / 78
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Lecture 3 Background Material Prof. Paczkowski Introduction Introduction We need to have several tools at our disposal before we can study theories of economic growth. Continuous compound growth formulas Production functions Basic Keynesian macrotheory Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 3 / 78
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Lecture 3 Background Material Prof. Paczkowski Background Solving for the Number of Periods Compound Interest with Nonannual Periods Part II Continuous Compound Growth Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 4 / 78
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Lecture 3 Background Material Prof. Paczkowski Background Solving for the Number of Periods Compound Interest with Nonannual Periods Continuous Compound Growth A very important tool for understanding economic growth is compound interest Yes! Interest! It’s obviously the formula and logic of compounding that is important here, not interest per se Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 5 / 78
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Lecture 3 Background Material Prof. Paczkowski Background Solving for the Number of Periods Compound Interest with Nonannual Periods Compound Interest Problem 1 You deposit $100 in a savings account today at 5% per annum. How much do you have in 3 years? Note that the 5% is per annum. 5% will be paid once each year on the balance at posting. The APR is 5%. Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 6 / 78
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Lecture 3 Background Material Prof. Paczkowski Background Solving for the Number of Periods Compound Interest with Nonannual Periods Compound Interest (Continued) Definitions The interest rate is said to be simple if interest is paid only on the initial investment. The interest rate is said to be compound if interest is paid not only on the initial investment, but also on any interest re-invested in the previous periods. Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 7 / 78
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Lecture 3 Background Material Prof. Paczkowski Background Solving for the Number of Periods Compound Interest with Nonannual Periods Compound Interest Future Value Definitions The Future Value of an investment after n periods at a real ROR r is. . . FV r , n = PV (1 + r ) n where. . . FV r , n = Future value after n periods at a rate of r% per period PV = Present investment amount r = Real interest rate n = Number of periods (e.g., years) Prof. Paczkowski (Rutgers University) Lecture 3 Background Material Spring, 2010 8 / 78
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Lecture 3 Background Material Prof.
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Lecture+3a - Lecture 3 Background Material Prof. Paczkowski...

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