EC140 Lecture Notes - Lecture 14: Monetarism, Capital Outflow, Potential Output

• School: WLU
• Department: Economics
• Course: EC140
• Professor: All

Document Summary

For simplicity we assume people have two types of inancial assets: money earns no interest, bonds earns interest. Dollar one year from now is less valuable than dollar today: dollar today can earn interest. Equaion pv = fv / (1 + i)n. General relaionship: present value of any bond that promises future payment or sequence of future payments is negaively related to market interest rate. Present value of a bond is most someone would be willing to pay now to own the bond"s future stream of payments. Equilibrium market price of any bond is present value of the income stream it produces. Discussion leads to two important proposiions: pv of a bond is negaively related to the market interest rate. Increase in market interest rate fall in price of bonds. Decrease in market interest rate increase in price of bonds: market price for a bond should equal its pv.