This is a short summary of Unit 10 needed for the course macroeconomics for the first year of the study economics and business economics in Utrecht. The summary is based on the book The Economy: Economics for a Changing World and includes illustrations from the book for clarification.
H10 Banks, money and the credit market
10.1 Money and wealth
Money is used because barter is limited, not everyone wants to trade for
something you can offer. It requires trust to function.
Wealth is the maximum amount you can consume with money without
borrowing, after you have sold everything you own. It can also include:
health, skills or human capital.
Income is the money you receive over time (a flow variable). Depreciation is the loss of
wealth due to wear and passing of time. Net income = gross income – depreciation.
10.2 Borrowing: bringing consumption forward in time
Repayment = principal + inflation.
Interest = repayment / principal - 1
Budget 91$
Now 70 = later (91-70)*1,1 = 23
Budget 56$
Now 30 = later (56-30(*1,78) = 100
All possibilities together are feasible frontier.
10.3 Impatience and the diminishing marginal returns to consumption
How much consumption will be brought forward? People can be impatient:
Just a personality trait. Pure impatience people will value consumption now over
later, even if it’s the same value at each moment.
o Myopia (short-sightedness): present satisfaction better than future. people
experience
o Prudence: people might not be around later, so better consume now.
Smoothing out consumption, so more now than later on.
This can be because of diminishing marginal return to consumption, having a lot later
sucks compared to having little now.
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