The credit market: borrowers, lenders, and the rate of interest

What is income

• the amount of money one receives over some period of time (flow).

• Buildings, land, machinery, capital goods – debts owed + debts owed to you

• •The maximum amount you could consume and leave wealth unchanged.

What is depreciation?

• reduction in the value of a stock of wealth over time.

• rearrange our capacity to buy goods and services across time

• expenditure on newly produced capital goods.

Interest rate (r)

• The value of an additional unit of consumption declines, the more consumption the individual has.

• Tradeoff between current and future consumption

• The price of bringing some buying power forward in time.

Borrowing and lending allow us to rearrange our capacity to buy goods and services across time.

• True

• False

Myopia (short-sightedness): People experience the past satisfaction more strongly than the same satisfaction later.

• True

• False

A balance sheet summarises what the household or firm owns, and what it owes to others.

• True

• False