Post Lesson 23/Pre Lesson 24

Folks,

now we will begin in personal finance! This is an important topic and one in which economics has a lot to say. Why do we invest? Why don't we just buy everything now? Why do other people borrow the money we aren't spending? What encourages or discourages people to lend/borrow? Specifically, answer these questions in your journal as you READ HO 167-170 & 177-180 as well as BE 299-303 (Financial Investments):

1. Explain why lending/borrowing occurs using the definition of economics and the basic principles.
2. What encourages or discourages people to lend/borrow?

The lesson this time was straightforward. Everyone gains from trade because trading changes the costs we face. If someone else has a lower opportunity cost, even if we might be better at it absolutely, we can trade and obtain a cost lower than our own. In doing so we can "skirt" the scarcity of our resources by relying on others thereby seemingly increasing the resources we have.

This is shocking and hard to believe but it's true because all prices (and costs) are a result of relationships between things. Recall that definition of economics, that piece about alternate uses, and when we realize that prices merely reflect those scarce resources and their alternative uses we begin to see that all they tell us is the relationships between things. Thus most attempts to interfere with trade, like attempts to interfere with prices to make things "cheaper" only tend to obscure the true relative value between goods or uses of those goods. Anyway...sorry for the diatribe. You need to be aware of the fallacies of trade restrictions like tariffs save jobs, low wages are unfair and make us uncompetitive, etc. that we may or may not have talked about but was in the reading. You will be evaluated on those things and should be ablt to apply the logic of prices and the principles of economics to trade.

Yesterday was a check plus by the way. You should also be able to answer these questions:

1. What is the relationship between real and nominal interest rates?
2. T / F When comparing monetary values from different time periods it is best to convert them to a common base year, typically present value.
3. If demand for loans rises and supply falls, the interest rate will INCREASE or DECREASEuntil equilibrium is reached. When loan prices are LOW or HIGHfirms are more inclined to borrow.
4. What is investment? How is it different from saving?
5. In your own words, describe the purpose or function of financial institutions.
6. Economic speculation is a way of allocating what scare resource?
7. What is interest?
8. In general, what effects would a cap on interest rates have on the market for loanable funds?

The additional reading which covers these questions are BE 295-326