ch 18 Flashcards
Functional Distribution of Income
(Wages, Rent, Interest & Profits)
Economic Rent
Payments for Land ((Demand for Land vs. Perfectly Inelastic Supply)
Risk
Greater chance the borrower will not repay his loan (Riskier loans have Higher Interest Rates)
Maturity
Time length of a loan indicates when it needs to be paid back (Longer term loans usually have Higher Interest Rates)
Loan Size
(Larger loans usually have Lower Interest Rates)
Taxability
Amount of return after paying taxes
(Interest on some local and state bonds is tax-free; Interest is lower, since lenders don’t have to pay federal taxes on that interest income)
Loanable Funds Theory of Interest (Demand & Supply)
describes how the demand for and supply of loan-able funds determines the interest rate.
Ø Supply of Loan-able Funds
Generally provided by Households through Savings
Ø Demand for Loan-able Funds
Typically comes from Firms for Investment in Capital
Time Value of Money (Inflation
is the idea that a specific amount of money is more valuable to a person the sooner it is obtained (Inflation).
Nominal Interest Rate
(rate expressed in inflation-adjusted dollars),
real interest rate
(rate expressed in current dollars).
Rule of 70
a method for determining the number of years it will take for some measure to double, given its annual percentage increase. To determine the number of years it will take for your money to double, divide 70 by the annual rate of interest.
Economic Profit (Explicit & Implicit Costs)
What remains of firm’s total revenue after it has paid individuals and other firms for materials, capital and labor supplied to the firm (Explicit Costs) and allowed for payment to self-employed resources (Implicit Costs).
Usury Laws
specify the maximum (legal) interest rate you can charge/be charged for a loan
Accounting Profit (Explicit Costs
Total Revenue – Explicit Costs
Insurable risks
insurance policies purchased and losses are reimbursed
