chapter 14 - Chapter 14 Market for loanable funds- one...

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Chapter 14 Market for loanable funds - one place where businesses get the money for new capital investments. Private households save and entrust their money to financial institutions, such as banks, insurance companies and so on. The financial institutions then make loans to businesses. Present discounted value of a future payment is the maximum amount that a person should be willing to pay today, in order to receive that payment in the future. Formula to earn interest on a dollar in 1 year: $1 today = $(1 + i) in one year If you will receive one dollar in a year: $(1 / (1+i)) today = $1 in one year If you put $1 in your account today and leave it in the account for N years, the dollar will grow to: $(1+i)^N At an interest rate of 8%, it takes about 9 years to double your money and if we multiply 8 by 9, we get 72. This is the Rule of 72 - over a fairly wide range of interest rates, the number of years to double your money is approximately equal to 72 divided by the interest rate (where the
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