MGMT 4A Lecture Notes - Lecture 8: Loanable Funds, Net Present Value, Capital Good
Document Summary
Interest rate: amount of $ that must be paid for the use of of loanable funds for a year in % Rate of return on capital: additional revenue earned from new capital, annual net return per $ invested capital. Depreciation: loss of value of capital good due to use tax deductible expense. Theory of loanable funds: assumes household supply investment funds by abstaining from consumption and accumulating savings over time. Upwards sloping curve reflects idea that households prefer present to future consumption and interest rate bribe to make them save. Interest rate: rations scarce supply of capital, induces sacrifice of current consumption to increase capital stock. If gov expands social security, supply curve for loanable funds and increase the interest rate will shift inward and market rate of interest will rise. As economy improves, demand curve for loanable funds and increase the interest rate. Net present value: $ value today of an income stream over time.
