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What is the role of banks in the financial markets?
How do we decide whether to accept a project in terms of NPV?
If NPV is positive --> accept the project
If NPV is negative --> reject the project
When should an asset be sold?
When rate of return = interest rate
What happens to the price of bonds when the interest rate paid by banks rises?
Price of bonds falls
What is a growing annuity?
A growing annuity pays a cashflow A with a constant growth rate g for T periods
What is a growing perpetuity?
A growing perpetuity pays a cashflow A with a constant growth rate g forever
What si the definition of an asset?
A commodity that provides a flow of services over time
Example: house
Intertemporal choice problem: If a consumer does not save or borrow what is their consumption?
c1 = m1
c2 = m2
Consuming at endowment point
What does present-valued mean?
All terms in period 1 values
What is the equilibrium condition in terms of arbitrage?
In Equilibrium there should be no opportunities for arbitrage
What is the effect of inflation on the slope of the budget constraint?
If the inflation rate increases --> slope of the budget constraint is less steep
If the inflation rate decreases --> slope fo the budget constraint more steep
What is a state-contingent contract?
One which is implemented when a particular state of nature occurs
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