Is a dollar today worth more than a dollar tomorrow?
YES; Opportunity cost and inflation. This is reason for charging and paying interest.
v = future value of $
p = present value of money
r= Real interest rate(nominal- inflation) expressed as decimal
n= years
k= number of times interest is credited per year
Simple interest rate~ v=(1+r)^n * p
Compound interest rate~ v=(1+ r/k)^nk *p
Money Demand
Demand for money has inverse relationship between nominal interest rates and the quantity of money demanded.
What happens when quantity demanded of money when interest rates rise? demand falls because individuals prefer to have interest earning assets instead of borrowed liabilities.
What happens when interest rates decrease? demand increases, no incentive to convert cash to interest earning assets
3 Things that cause money demand to shift:
change in price level
change in income
Change in taxation that affects investment
Financial Sector
Assets vs. Liabilities- Assets= Owned; Liabilities= Owe
Interest rate- The cost of borrowing money
Stocks vs. Bonds- stocks are risky money, bonds are safe. loan money to gov, gov pays you back.
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