2011 - 2.1.2011 PresentDiscountedValue

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2.1.2011 Present Discounted Value Suppose I told you I would sell you the right to receive 100 a year for  the rest of time (known as a  perpetuity ) o When you die, it goes to your children o Suppose there is no inflation o Suppose the interest rate is 10% forever How much is receiving 100 (A) per uear forever worth today (P) if the  interest rate I is 10% P=100/(1.1)+100/(1.1)^2+100/(1.1)^3+…100/1.1^∞=A/i=1,000 Present Discounted Value The idea is you can take $1000 and invest it at 10% and get back $100  every year. Saving and Investment Why do people save?/Individual level o More money, invest it o Retirement, life cycle reasons o Children education o Emergencies o Risk of job loss At National level Important for investment and economic growth Savings
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o Current income minus spending on current needs Saving rate o Savings divided by income Lots of attention on media  Household Savings Does this seem like a problem? o
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2011 - 2.1.2011 PresentDiscountedValue

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