This preview shows page 1. Sign up to view the full content.
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
This is the end of the preview. Sign up
to
access the rest of the document.
 Fall '10
 HAIDER
 Microeconomics

Click to edit the document details