ECON 105 Lecture Notes - Lecture 8: Opportunity Cost, Statics, Government Debt

• School: Simon Fraser University
• Department: Economics
• Course: ECON 105
• Professor: Brian Krauth

Document Summary

Firm pays back in one year. Result: financed project if and only is r r. R is the opportunity cost of investment regardless of whether we are borrowing or not. Suppose interest rates goes up from r0 to r1 (r0 < r1). If r < r0 < r1 =>project is never financed. If r > r0 > r1 => project is always financed. If r0 < r < r1 => project is financed at r0 not financed at r1. When r increase, i decreases, demand slopes down. Some examples of comparative statics or policy analysis: government increases g without increasing i (increases budget deficit) S public = t g decreases. S = s public + s private decreases. Supply curve shifts in: increases r, s private, decreases i, s. Budget deficit crowd out private investment: suppose the perceived profitability (r) of all investments projects goes down.