Lecture Notes 7

# Lecture Notes 7 - to period the of start at the capital of...

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Budget Constraint for Consumption in Present Period vs Later Period Present consumption C 0 Later consumption C 1 Y 0 Y 1 Slope = - (1+r) Constraint is C 1 = Y 1 + (Y 0 – C 0 )(1+r) or C 0 + C 1 / (1+r) = Y 0 + Y 1 / (1+r) Intercept is Y 0 + Y 1 / (1+r) borrowing saving Intercept is [Y 0 + Y 1 / (1+r)] [1+r] If Y 0 + Y 1 / (1+r) gets bigger, whole budget constraint moves out parallel. Y 0 + Y 1 / (1+r) is called the present discounted value (PDV) of the income stream

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Unformatted text preview: to period the of start at the capital of units K buying investor an For . is on depreciati physical of rate the and , is rate interest nominal the , is sector in the progress technical of rate the , is inflation of rate the period, the of start at the good capital the acquire to price the is time, of period a during capital of price rental the be Let δ ρ δρ + +-≈-+ + +-=-+--+ = +-+-+ + = i r i i r PK RK i r PK RK r i KP r RK PK r i P R The Rental Price of Capital...
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