Unformatted text preview: Interest Rate Determinants FIN 327
Prof. Hood Simple Case For now, leis assume mat we live in a closed eoonomy
andthere Is no inﬂation. if everyone consumed exactly what they produced, there
would be no savings or borrowing. This is notthe case. We need to establish what the supply and demand of
loanable funds are. In economic terms, an equilibrium
wlll exist if supply = demand fora given rate. Lets assume that people seek to maximize their expected
utility or happiness. No Exchange - Consider yourself as mlklng a consumption decision between
nowand later lperlodS= 0,1). You are endowed with a level of
whom. Y. . . You can either consume all the wheat new, or plant some or
allofthe seed to be consumed next period. - me more wheat you plant, the less marginal output you get from the ﬁeld for next period. You wantto moose the optimal mmbination of Wheat :0 consume (q , C, ) in period D and 1 dual maximizes your utililv- - Generalizingihis, we have a production frontier that is concave holding labor msunL 9/1/2010 2'
is ‘ mummymiwgqeamnrmwwwe ...
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- Fall '10