ECON 2 Midterm: Econ 2- Midterm 2 Study Guide
Document Summary
Chapter 27: the basic tools of finance: finance: eld that studies decision making occurring in the nancial system, time value of money: difference in value between money today and in the future. Present value (of a future sum): amount needed today to yield future sum at prevailing interest rates. Future value (of a sum): amount the sum will be worth in the future with interest. Economic growth builds on itself over time. Small annual growth rate can add up to a large change in an economy over time. Gdp (year a) = gdp (year b) x (1+ growth rate)^(year a-year b: risk aversion: disliking uncertainty [managed by insurance, utility function: subjective measure of well-being that depends on wealth. Diminishing marginal utility: more wealth = less extra utility from an extra dollar: two problems in insurance markets. Averse selection: high-risk person bene ts from insurance, so more likely to have.
