Week 6 Notes Econ
Week 6 Notes Econ FIN 501
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This 1 page Class Notes was uploaded by D S on Saturday October 17, 2015. The Class Notes belongs to FIN 501 at University of Illinois at Urbana-Champaign taught by Tatyana Deryugina in Summer 2015. Since its upload, it has received 25 views. For similar materials see Financial Economics in Finance at University of Illinois at Urbana-Champaign.
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Date Created: 10/17/15
Financial Economics Week 6 Professor Tatyana Derugvina University of Illinois Urbana Champaign 1 Intertemporal Choice intertemporal involving different points in time We ll be looking primary at two period modes how to de ne the goods in the intertemporal model aggregate measures of consumption at a particular time Co consumption expenditure in period Cl real expenditures only Goods are all considered normal The reason is that it would be weird to think about inferior goods Setting up the problem m measure of lifetime wealth interest rate the cost for borrowing and saving is the same pt price of 1 of consumption in period t measured in terms of period 0 p0 1 the price at your starting time should be the exact same price that you start with P1 Basic understanding of these parameters if r increases then p1 decreases Interest rate has increased so mch that consumption goes up in both periods Note you take into account both substitution and income effect Fisher s Separation Theorem If the consumer can borrow and save at the same interest rate then consumer maximizes utility by choosing the income stream with the highest present value regardless of his utility function consumer is going to prefer the one with the higher present value look at the graph on slide 27 for references Intuition for caring about this interesting when we depart from the ideal and deal with real life what happens when the rate of savings is different from rate of borrowing you get a kink in the line So frictions in capital markets force people to make choices about income streams that reduce utility area of xing this issue by investing in human capital Discount Utility utility maximizing choice over tiem will depend on how an individual feels about waiting to consume and most people are impatient Life Cycle Model pretty relevant one take away is that people s level of consumption stays constant irrespective of their income usually
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