Lecture Notes 7 Investment, Funds Market, General Equilibrium

Question 1

present value

Answer 1

value of a future payment in terms of today’s current. it is equal to the amount of money that must be invested today at the given real interest rate to be worth the specified future amount

Question 2

as the real interest rate increases, the present value of future benefits increases/decreases?

Answer 2

as the real interest rate increases, the present value of future benefits decreases

Question 3

temporary shock

Answer 3

affects the economy during one period and affects either the current period or the future period

S = h (Y1 +, Y2 -, W -, r+)

Question 4

temporary shock: MPCt < 1

Answer 4

household increases current consumption by less than a dollar if current income increases by a dollar

Question 5

permanent shocks

Answer 5

affects both current income, Y1 and future income Y2. because of permanent effects, households don’t change their saving behavior.

MPCp = 1
Household knows that the current good news will also be present in the future and therefore the household has no incentive to save increased current resources for the future as future resources will improve too