Capital, Interest, Growth Rates and Discounting

Question 1

What is capital? Human capital?

Answer 1

• Capital
(financial assets or the financial value of assets, such as cash)
o Different from money
o More durable used to generate wealth through investment
• Human capital
(measure of the economic value of an employs skill set)
o Not all labor is equal and that the quality of employees can be improved by investing in them

Question 2

What role does capital play in the macroeconomy in the short-run? Long-run?

Answer 2

• Short-run
o Investment and Agg D
• Long-rub
o Output and growth

Question 3

What is interest?

Answer 3

• The charge for the privilege of borrowing money, typically expresses as an annual percentage
o Lender make money from interest, borrowers pay it
• Earn interest by lending money to a bank
• The amount of ownership a stockholder has in company, usually expressed as a percentage

Question 4

How do you calculate compound growth?

Answer 4

• Compound interest
o FV=PV(1+i)^n
• PV= present value, FV= future value
• A=P(1+r/n)^(nt)

Question 5

How and why do we discount future $ values?

Answer 5

• Discount future values because the amount could earn interest
• Present discounted value
o PV=FV/(1+i)^n

Question 6

What affects the present value of the future amount?

Answer 6

• The higher the interest rate
o The lower the PV and the higher the FV
• Time
o The more time passes the higher the FV will be if the PV is constant

Question 7

How are the real and financial capital related?

Answer 7

• Real capital is distinguished from financial capital, which is funds available to require capital
o Real capital
(capital, such as equipment and machinery)
• Assets
o Financial capital
(borrowed sums or equity with which the firms assets are acquired and its operations are funded)
• Liabilities or shareholders equity

Question 8

How does an increase in capital affect labor?

Answer 8

• Capital makes labor productive. Increase in capital increases labor production