Open Yale CoursesECON 251: Financial TheoryLecture 5 - Present Value Prices and the Real Rate of Interest<< previous session| next session >>Overview:Philosophers and theologians have railed against interest for thousands of years. But that is because theydidn't understand what causes interest. Irving Fisher built a model of financial equilibrium on top of generalequilibrium (GE) by introducing time and assets into the GE model. He saw that trade between apples todayand apples next year is completely analogous to trade between apples and oranges today. Similarly he sawthat in a world without uncertainty, assets like stocks and bonds are significant only for the dividends theypay in the future, just like an endowment of multiple goods. With these insights Fisher was able to show thathe could solve his model of financial equilibrium for interest rates, present value prices, asset prices, and
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