Wednesday, September 20, 2017

9:07 AM

    Outline

    1. Real v. nominal i-rates
    2. Production
      1. How? (micro)

What are interest rates? 

=Cost of borrowing

=Benefit to lending

Example

1 year loan.  Principal = $100.  interest rate (i) = .1

 

 

 

Year

Financial Flows

Pizza Flows (implicit)

P pizza

1

Lender->$100 -> borrower

Lender->10->borrower

$10

2

Borrower -> $110 -> lender

Borrower->5.5->lender

$20

 

 

 

In example

Real interest rate = (5.5 - 10) / 10 = -0.45

In example, real interest rate was -45%

 

 

 

Interest rates are v. highly

correlated

 

 

Observation: The cost of borrowing

For gov't was greater in 1995 (i~6%) than in 1979 (i~9%)

-remember cost = opt cost

 

Observations: rising prices mean that cost of borrowing (=benefit from lending) is lower.  Inflation benefits borrowers at the expense of lenders

 

Created with Microsoft OneNote 2016.