lecture13 - Economics 103 Lecture # 13 Choice Over Time And...

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Economics 103 Lecture # 13 Choice Over Time And the Interest Rate: The Microfoundations of Macroeconomics.
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Interest Rates For some reason we think these are magical or mystical. Probably because we spend so much time plotting and reporting them. However, an interest rate is just a price. Like all prices, it is determined in a market through supply and demand.
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To understand interest rates takes only a minor adjustment to our basic model. What do you think that adjustment is? We need to worry about choice over time.
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We constantly make choices across time When you consume today, you can’t consume that wealth tomorrow. When you borrow today, you can’t consume that wealth tomorrow. Saving today is shifting wealth from today to tomorrow.
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We make choices over time because many goods are stocks . Stocks are goods that yield service through time. Any capital good is a form of capital stock that provides services through time. To decide to buy one, rather than rent, you need to consider choices over time. Eg. Renting an apartment vs. owning a home, is a choice that involves intertemporal decision making.
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How do we deal with this? We just assume the goods are Consumption Today and Consumption Tomorrow . This is instead of assuming the goods are apples vs. oranges. Now it is just apples today vs. apples tomorrow. Just like there is a demand for apples, there is a demand for apples today.
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The demand for consumption today is: “r” is the real interest rate 1+r is the amount of goods you must pay back next period for using them this period. If you give up 1 unit of consumption today, you get back (1+r) next period. So an interest rate is just the price of early consumption.
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The interest rate is not the “price of money.” The nominal interest rate is the “price of using money”. But why is the demand curve positive?
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Our sixth principle is called the Rate of Time Preference. Principle #6 Other things equal, people always prefer a good today rather than in the future.
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consumption out over their life? Why was it so valuable to shift consumption?
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lecture13 - Economics 103 Lecture # 13 Choice Over Time And...

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