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KIC000019 - «e Exchange What happens when were an nth-rill...

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Unformatted text preview: ... _. «e_,_ Exchange What happens when were an nth-rill the dairi'i b wrmn and future ennsumvtiun with others? Giving up consumption may mean: you should he ahie ta male more tomorruw. Thell nudlvlndtdmomisfiiemeof interest. For new linen/Dune endowedwith-oemin Mum and mefurtherttielineshil'uout,die mueyou have. Combining Production and Exchange if we eumhine the ml the optimal production decision iswhere the exchange line is magenta: the imntier. Thlsgives us Iii- minimum endowment. We flier-i an move along the exchange linen: hide all contumetian based on the me at inter-5L Vou may ward In consume mare than the optimal madman _Irnaun1 for today, so you ham. or you may choose In consume less, so you lend. This is determined by your utility function. Note that with pmduction Ind eternal: your optimal duke of whit to pmduce now end lflzr tic-u not depend on utility. This is filled the Sum Theorem. Equilibrium ll there is more swings than borroan combining the individuals in the market, then the price of borrowing or lending change. This means the slope of the line will change until the amount borrowed = amount lent. As we vary the rate of interest I, there will be an aggregate amount of lending and bon'owing desired across all agents in the economy. This aggregate is the supply and demand mm. Where they intersect is the equilibrium rate of interest. 9/1/2010 ...
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