RSM332H1 Lecture : Class 1
Document Summary
The 2-period model of intertemporal allocation of consumption. The 2-period model of intertemporal allocation of consumption, together with its extension to a simple model of investment, provides a useful framework for understanding several important relationships and decisions in finance. The 2-periods may be thought of as: now versus later, or today versus tomorrow, or the present generation versus future generations. The 2-period context captures the idea that one makes decisions today concerning consumption, savings and investment that have consequences for consumption tomorrow. The idea is that money is used to consume things - food, clothing, housing, entertainment, et cetera. In our course in finance, the reason for introducing the 2-period model is to provide a conceptual framework for understanding the economic function of capital markets and the behaviour of individuals with respect to that market. Among the concepts and issues addressed in the 2-period model are: The economic (allocative) role of the interest rate.
