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Unformatted text preview: Simplest: all costs today, all revenues in 1 yr. o Cost=$1000 today o Rev= $1100 in 1 yr. i Net PDV Action 5%-1000+(1100/1.05)=$47.12 Do it! 10%-1000+(1100/1.1)=0 do it 15%-1000+(1100/1.15)= -$43.48 Dont do it!! o Firms D curve for loanable funds for investment Supply of Loanable funds comes from saving done by households Credit market equilibrium In fact, family of i*, different i* depend on risk Federal rate< safest companies< other companies< loan shark Recent months: in risk premia, even for solid firms Usury Laws= interest-rate ceilings If usury ceiling> equil. Interest rate, equil. Legal usury has no effect But what if o 1. Law enforced and o 2. Usury ceiling < equil. ? Shortage of credit is the difference between S s usury and I d usury...
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This note was uploaded on 04/19/2011 for the course EC 201 taught by Professor Ballard during the Fall '08 term at University of Michigan.
- Fall '08