19 - Total surplus is lessened into a trapezoid when an...

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Total surplus is lessened into a trapezoid when an interest rate is set that is below the equilibrium (more people want to save) - make sure that you use the point where it interests the supply curve to find the point where to draw the top of the trapezoid - the base of the trapezoid will be the entire X axis Nominal interest rate (i) is (approximately equal to real interest rate (r) plus expected inflation E(pi) I = r + E(pi) Risk = p I = r + E(pi) + r Risk premium 1) future intrest rates are uncertain and long-term bonds (and investments) are riskier because their price is exposed to interest rate risk term premium 2) Short term bonds are more liquid (easy to sell if needed) --? Liquidity premium on longer term bonds 3) Not so relevnt for US government bonds, but important for corporate bonds and emerging market bonds (European bonds) default premium Different expectations (defaulting) depending on timing Y / L = A F(1, K/L, H/L, N/L) K(t+1) = I + K(t) – D x K(t) There is a link between productivity and investment
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