ECON 201 SEU Inflation & Unemployment Macro Economics Paper

Description


‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 2
Macroeconomics (ECON 201)
Due Date:16th April 2022 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: II
CRN:
Academic Year:2021-22-2nd
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: 00 / 10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY








The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
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Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.
Chapter 13, 14 & 15: Critical Thinking: Financial System: Saving and Investment &
Unemployment and Its Natural Rate: (10 Points)
In the second assignment for the Macroeconomics course, the students are required to choose a specific
area from the subject and answer the questions given, upon successful completion of the assignment; the
student should be able to achieve the following learning outcomes:
Learning Outcomes:
1. Describe how to evaluate macroeconomic conditions such as unemployment, inflation, and
growth. [CLO 1.2]
2. Recognize the fundamental determinant’s of a nation’s long-run economic growth. [CLO 1.3]
Reference Source:
Textbook: – Mankiw, N. Gregory. Principles of Macroeconomics, 6th ed. Mason, OH: South-Western
Cengage Learning, 2011. ISBN: 9780538453066 (hard copy); ISBN: 9781115468523 (eBook)
Q.1. Critical Thinking: Financial System: Saving and Investment: Chapter 13: (4 Points)
Suppose the government borrows $20 billion more next year than this year.
a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?
b. What happens to investment, private saving, public saving, and national saving? Compare the
size of the changes to the $20 billion of extra government borrowing.
c. How does the elasticity of supply of loanable funds affect the size of these changes?
d. How does the elasticity of demand for loanable funds affect the size of these changes?
e. Suppose households believe that greater government borrowing today implies higher taxes to
pay off the government debt in the future. What does this belief do to private saving and the
supply of loanable funds today? Does it increase or decrease the affects you discussed in parts (a)
and (b)?
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Q.2. Critical Thinking: Financial System: The Basic Tools of Finance: Chapter 14: (3 Points)
When company executives buy and sell stock based on private information they obtain as part of
their jobs, they are engaged in insider trading.
a. Give an example of inside information that might be useful for buying or selling stock.
b. Those who trade stocks based on inside information usually earn very high rates of return.
Does this fact violate the efficient markets hypothesis?
c. Insider trading is illegal. Why do you suppose that is?
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Q.3. Problems and Applications: Unemployment: Chapter 15: (3 Points)
The Bureau of Labor Statistics announced that in April 2010, of all adult Americans,
139,455,000 were employed, 15,260,000 were unemployed, and 82,614,000 were not in the labor
force. Use this information to calculate:
a. The Adult Population
b. The Labor Force
c. The Labor-Force Participation Rate
d. The Unemployment Rate
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Answer:
N. Gregory Mankiw
Principles of
Macroeconomics
Sixth Edition
13
Saving, Investment,
and the Financial System
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Premium
PowerPoint
Slides by
Ron Cronovich
In this chapter,
look for the answers to these questions:
• What are the main types of financial institutions
in the U.S. economy, and what is their function?
• What are the three kinds of saving?
• What’s the difference between saving and
investment?
• How does the financial system coordinate saving
and investment?
• How do govt policies affect saving, investment,
and the interest rate?
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
Financial Institutions

The financial system: the group of institutions that helps match the saving
of one person with the investment of another .

‫ مجموعة المؤسسات التي تساعد في مطابقة إنقاذ شخص واحد باستثمار شخص آخر‬:‫النظام المالي‬

Financial markets: institutions through which savers can directly provide funds to
borrowers. Examples:

:‫ أمثلة‬.‫ المؤسسات التي يمكن من خاللها للمدخرين تقديم األموال مباشرة إلى المقترضين‬:‫األسواق المالية‬
▪ The Bond Market. ‫سوق السندات‬
A bond is a certificate of indebtedness.‫السند هو شهادة المديونية‬
▪ The Stock Market. ‫سوق االسهم‬
A stock is a claim to partial ownership in a firm. ‫السهم هو ملكية جزئية في شركة‬
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Financial Institutions


Financial intermediaries: institutions through which savers can indirectly
provide funds to borrowers. Examples:
.‫ المؤسسات التي يمكن من خاللها للمدخرين توفير األموال للمقترضين بشكل غير مباشر‬:‫الوسطاء الماليون‬
:‫أمثلة‬
▪ Banks
▪ Mutual funds – institutions that sell shares to the public and use the
proceeds to buy portfolios of stocks and bonds

‫ المؤسسات التي تبيع األسهم للجمهور وتستخدم العائدات لشراء محافظ األوراق‬- ‫الصناديق المشتركة‬
‫المالية والسندات‬
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The Financial Crisis of 2008–2009
▪ A financial crisis led to a deep recession in the U.S.
and around the world. A few unemployment rates:
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FYI: Elements of Financial Crises
▪ Large decline in some asset prices
▪ 2008–2009: Housing prices fell 30%.
▪ Insolvencies at financial institutions
▪ 2008–2009:
Banks and other institutions failed when many
homeowners stopped paying their mortgages.
▪ Decline in confidence in financial institutions
▪ 2008–2009:
Customers with uninsured deposits began
pulling their funds out of financial institutions.
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FYI: Elements of Financial Crises
▪ Credit crunch
▪ 2008–2009: Borrowers unable to get loans
because troubled lenders not confident in
borrowers’ credit-worthiness.
▪ Economic downturn
▪ 2008–2009: Failing financial institutions and a
fall in investment caused GDP to fall and
unemployment to rise.
▪ Vicious circle
▪ 2008–2009: The downturn reduced profits and
asset values, which worsened the crisis.
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Different Kinds of Saving
Private saving ‫االدخار الخاص‬
=
The portion of households’ income that is not used for consumption or
paying taxes
‫نسبة دخل األسر المعيشية التي ال تستخدم في االستهالك أو دفع الضرائب‬
= Y–T–C
Public saving ‫االدخار العام‬
= Tax revenue less government spending
‫اإليرادات الضريبية ناقص اإلنفاق الحكومي‬
=T–G
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National Saving
National saving ‫االدخار القومي‬
= private saving + public saving
=
=
(Y – T – C) +
(T – G)
Y – C – G
= the portion of national income that is not used
for consumption or government purchases
‫جزء من الدخل القومي الذي ال يستخدم لالستهالك أو المشتريات‬
‫الحكومية‬
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Saving and Investment
Recall the national income accounting identity:
‫ هوية محاسبة الدخل القومي‬:‫تذكير‬
Y = C + I + G + NX
For the rest of this chapter, focus on the closed
economy case:
national saving
Y=C+I+G
Solve for I:
I = Y–C–G
= (Y – T – C) + (T – G)
Saving = investment in a closed economy
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Budget Deficits and Surpluses
Budget surplus ‫فائض الميزانيه‬
= an excess of tax revenue over govt spending
‫زيادة في عائدات الضرائب على اإلنفاق الحكومي‬
= T–G
= public saving
Budget deficit ‫عجز الميزانيه‬
= a shortfall of tax revenue from govt spending
‫نقص في عائدات الضرائب من اإلنفاق الحكومي‬
= G–T
= – (public saving)
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ACTIVE LEARNING
1
A. Calculations
▪ Suppose GDP equals $10 trillion,
consumption equals $6.5 trillion,
the government spends $2 trillion
and has a budget deficit of $300 billion.
▪ Find public saving, taxes, private saving,
national saving, and investment.
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ACTIVE LEARNING
1
Answers, part A
Given:
Y = 10.0,
C = 6.5,
G = 2.0,
G – T = 0.3
Public saving = T – G = – 0.3
Taxes: T = G – 0.3 = 1.7
Private saving = Y – T – C = 10 – 1.7 – 6.5 = 1.8
National saving = Y – C – G = 10 – 6.5 = 2 = 1.5
Investment = national saving = 1.5
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ACTIVE LEARNING
1
B. How a tax cut affects saving
▪ Use the numbers from the preceding exercise,
but suppose now that the government cuts taxes
by $200 billion.
▪ In each of the following two scenarios,
determine what happens to public saving,
private saving, national saving, and investment.
1. Consumers save the full proceeds of the
tax cut.
2. Consumers save 1/4 of the tax cut and spend
the other 3/4.
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ACTIVE LEARNING
1
Answers, part B
In both scenarios, public saving falls by
$200 billion, and the budget deficit rises
from $300 billion to $500 billion.
1. If consumers save the full $200 billion,
national saving is unchanged,
so investment is unchanged.
2. If consumers save $50 billion and spend $150
billion, then national saving and investment
each fall by $150 billion.
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ACTIVE LEARNING
1
C. Discussion questions
The two scenarios from this exercise were:
1. Consumers save the full proceeds of the
tax cut.
2. Consumers save 1/4 of the tax cut and spend
the other 3/4.
▪ Which of these two scenarios do you think is
more realistic?
▪ Why is this question important?
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The Meaning of Saving and Investment
▪ Private saving is the income remaining after households pay their
taxes and pay for consumption.
▪ ‫االدخار الخاص هو الدخل المتبقي بعد أن تدفع األسر ضرائبها وتكاليف االستهالك‬
▪ Examples of what households do with saving:

‫أمثلة على ما تفعله األسر مع االدخار‬
▪ Buy corporate bonds or equities




‫شراء سندات الشركات أو األسهم‬
Purchase a certificate of deposit at the bank
‫شراء شهادة اإليداع في البنك‬
Buy shares of a mutual fund
▪ ‫شراء أسهم صندوق مشترك‬
▪ Let accumulate in saving or checking accounts
▪ ‫يدعونها تتراكم في المدخرات أو التحقق من الحسابات‬
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The Meaning of Saving and Investment
▪ Investment is the purchase of new capital.

‫االستثمار هو شراء رأس مال جديد‬
▪ Examples of investment:
▪ General Motors spends $250 million to build
a new factory in Flint, Michigan.
▪ You buy $5000 worth of computer equipment for your business.
▪ Your parents spend $300,000 to have a new house built.
Remember: In economics, investment is NOT
the purchase of stocks and bonds!
!‫ االستثمار ليس شراء األسهم والسندات‬، ‫ في االقتصاد‬:‫تذكر‬
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The Market for Loanable Funds
▪ A supply–demand model of the financial system
▪ Helps us understand
▪ how the financial system coordinates
saving & investment
▪ how govt policies and other factors affect saving, investment, the
interest rate




‫نموذج العرض والطلب في النظام المالي‬
‫يساعدنا على فهم‬
‫كيف ينسق النظام المالي؟ االدخار واالستثمار‬
‫كيف تؤثر سياسات الحكومة وعوامل أخرى على االدخار واالستثمار وسعر الفائدة‬
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The Market for Loanable Funds
Assume: only one financial market
▪ All savers deposit their saving in this market.
▪ All borrowers take out loans from this market.
▪ There is one interest rate, which is both the return to
saving and the cost of borrowing.
▪ ‫ سوق مالية واحدة فقط‬:‫افترض‬
▪ .‫جميع المدخرين إيداع مدخراتهم في هذا السوق‬
▪ .‫جميع المقترضين يحصلون على قروض من هذا السوق‬
▪ ‫ وهو العودة إلى االدخار وتكلفة االقتراض‬، ‫هناك سعر فائدة واحد‬
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The Market for Loanable Funds
The supply of loanable funds comes from saving:
▪ Households with extra income can loan it out and earn
interest.
▪ Public saving, if positive, adds to national saving and
the supply of loanable funds.
If negative, it reduces national saving and the supply of
loanable funds.
:‫يأتي توفير األموال القابلة للقرض من االدخار‬
.‫يمكن لألسر ذات الدخل اإلضافي إقراضها وكسب الفائدة‬
‫ يضيف إلى االدخار الوطني وإمدادات األموال‬، ‫ إذا كان إيجابيا‬، ‫االدخار العام‬
.‫القابلة للقرض‬
.‫ فإنه يقلل من االدخار الوطني وإمدادات األموال القابلة للقرض‬، ‫إذا كان سلبيا‬
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The Slope of the Supply Curve
Interest
Rate
Supply
6%
3%
60
80
An increase in
the interest rate
makes saving
more attractive,
which increases
the quantity of
loanable funds
supplied.
Loanable Funds
($billions)
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The Market for Loanable Funds
The demand for loanable funds comes from
investment:
▪ Firms borrow the funds they need to pay for
new equipment, factories, etc.
▪ Households borrow the funds they need to
purchase new houses.
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The Slope of the Demand Curve
A fall in the interest
rate reduces the cost
of borrowing, which
increases the quantity
of loanable funds
demanded.
Interest
Rate
7%
4%
Demand
50
80
Loanable Funds
($billions)
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Equilibrium
Interest
Rate
Supply
The interest rate
adjusts to equate
supply and demand.
The eq’m quantity
of L.F. equals
eq’m investment
and eq’m saving.
5%
Demand
60
Loanable Funds
($billions)
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Policy 1: Saving Incentives
Interest
Rate
S1
S2
5%
4%
D1
60 70
Tax incentives for
saving increase
the supply of L.F.
…which reduces the
eq’m interest rate
and increases the
eq’m quantity of L.F.
Loanable Funds
($billions)
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Policy 2: Investment Incentives
Interest
Rate
An investment tax
credit increases the
demand for L.F.
S1
6%
5%
D2
…which raises the
eq’m interest rate
and increases the
eq’m quantity of L.F.
D1
60 70
Loanable Funds
($billions)
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ACTIVE LEARNING
2
Budget deficits
▪ Use the loanable funds model to analyze
the effects of a government budget deficit:
▪ Draw the diagram showing the initial
equilibrium.
▪ Determine which curve shifts when the
government runs a budget deficit.
▪ Draw the new curve on your diagram.
▪ What happens to the equilibrium values of the
interest rate and investment?
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ACTIVE LEARNING
Answers
2
S2
Interest
Rate
S1
A budget deficit reduces
national saving and the
supply of L.F.
…which increases the
eq’m interest rate
6%
5%
and decreases the
eq’m quantity of L.F.
and investment.
D1
50 60
Loanable Funds
($billions)
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Budget Deficits, Crowding Out,
and Long-Run Growth
▪ Our analysis:
Increase in budget deficit causes fall in investment.
The govt borrows to finance its deficit,
leaving less funds available for investment .
This is called crowding out.
.‫زيادة في عجز الميزانية يسبب انخفاض االستثمار‬
.‫ مما يترك أقل األموال المتاحة لالستثمار هذا يسمى المزاحمة‬، ‫تقترض الحكومة لتمويل عجزها‬

Recall from the preceding chapter: Investment is important for long-run
economic growth.
Hence, budget deficits reduce the economy’s growth rate and future
standard of living .

‫ فإن العجز في الميزانية يقلل من معدل نمو‬، ‫ وبالتالي‬.‫االستثمار مهم للنمو االقتصادي على المدى الطويل‬
‫االقتصاد ومستوى المعيشة في المستقبل‬
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
The U.S. Government Debt
▪ The government finances deficits by borrowing
(selling government bonds).
▪ Persistent deficits lead to a rising govt debt.
▪ The ratio of govt debt to GDP is a useful
measure of the government’s indebtedness
relative to its ability to raise tax revenue.
▪ Historically, the debt-GDP ratio usually rises
during wartime and falls during peacetime—until
the early 1980s.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
U.S. Government Debt
as a Percentage of GDP, 1970–2010
WW2
63.6% in
2010
Revolutionary
War
Civil
War
WW1
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
CONCLUSION
▪ Like many other markets, financial markets are
governed by the forces of supply and demand.
▪ One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
Financial markets help allocate the economy’s
scarce resources to their most efficient uses.
▪ Financial markets also link the present to the future:
They enable savers to convert current income into
future purchasing power, and borrowers to acquire
capital to produce goods and services in the future.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
SUMMARY
• The U.S. financial system is made up of many types of financial

institutions, like the stock and bond markets, banks, and mutual
funds.
‫ مثل أسواق األسهم والسندات‬، ‫يتكون النظام المالي في الواليات المتحدة من عدة أنواع من المؤسسات المالية‬
.‫ وصناديق االستثمار المشتركة‬، ‫ والبنوك‬،
• National saving equals private saving plus public saving.
• .‫االدخارالوطني يساوي االدخار الخاص باإلضافة إلى المدخرات العامة‬
• In a closed economy, national saving equals investment. The
financial system makes this happen.
• .‫ النظام المالي يجعل هذا يحدث‬.‫ فإن االدخار الوطني يساوي االستثمار‬، ‫في اقتصاد مغلق‬
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2012 Cengage
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Learning.
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Rights Reserved.
May notMay
be copied,
not be copied,
scanned,scanned,
or duplicated,
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in part,
or in
except
part,for
except
use as
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with a product
certain product
or service
or or
service
otherwise
or otherwise
on a password
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website website
for classroom
for classroom
use. use.
SUMMARY
• The supply of loanable funds comes from saving. The demand for
funds comes from investment. The interest rate adjusts to balance
supply and demand in the loanable funds market.
• ‫ يتم‬.‫ يأتي الطلب على األموال من االستثمار‬.‫العرض من األموال القابلة للقرض يأتي من االدخار‬
‫تعديل سعر الفائدة لموازنة العرض والطلب في سوق األموال القابلة لإلقراض‬
• A government budget deficit is negative public saving, so it reduces
national saving, the supply of funds available to finance investment.
• ‫ وتوفير‬، ‫ وبالتالي يقلل من االدخار الوطني‬، ‫العجز في الموازنة الحكومية هو توفير عام سلبي‬
.‫األموال المتاحة لتمويل االستثمار‬
• When a budget deficit crowds out investment, it reduces the growth
of productivity and GDP.
• .‫ فإنه يقلل من نمو اإلنتاجية والناتج المحلي اإلجمالي‬، ‫عندما يخرج عجز الميزانية عن االستثمار‬
© 2012©Cengage
2012 Cengage
Learning.
Learning.
All Rights
AllReserved.
Rights Reserved.
May notMay
be copied,
not be copied,
scanned,scanned,
or duplicated,
or duplicated,
in wholeinorwhole
in part,
or in
except
part,for
except
use as
for use as
permitted
permitted
in a license
in a distributed
license distributed
with a certain
with a product
certain product
or service
or or
service
otherwise
or otherwise
on a password
on a password
-protected
-protected
website website
for classroom
for classroom
use. use.
Policy 3: Govt Budget Deficits
Interest
Rate
S2
S1
A budget deficit reduces
national saving and the
supply of L.F.
6%
5%
D1
50 60
…which increases
the eq’m interest rate
and decreases the
eq’m quantity of L.F.
Loanable Funds
($billions)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
N. Gregory Mankiw
Principles of
Macroeconomics
Sixth Edition
14
The Basic Tools of
Finance
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permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
Premium
PowerPoint
Slides by
Ron Cronovich
In this chapter,
look for the answers to these questions:
• What is “present value”? How can we use it to
compare sums of money from different times?
• Why are people risk averse?
How can risk-averse people use insurance
and diversification to manage risk?
• What determines the value of an asset?
What is the “efficient markets hypothesis”?
Why is beating the market nearly impossible?
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
Introduction
▪ The financial system coordinates saving
and investment.

.‫يقوم النظام المالي بتنسيق االدخار واالستثمار‬
▪ Participants in the financial system make decisions regarding the
allocation of resources over time
and the handling of risk.

.‫يتخذ المشاركون في النظام المالي قرارات تتعلق بتخصيص الموارد مع مرور الوقت ومعالجة المخاطر‬
▪ Finance is the field that studies such
decision making.

.‫التمويل هو المجال الذي يدرس مثل هذا القرار‬
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Present Value: The Time Value of Money
▪ To compare sums from different times, we use the concept of
present value.

‫ نستخدم مفهوم القيمة الحالية‬، ‫لمقارنة المبالغ من أوقات مختلفة‬
▪ The present value of a future sum: the amount that would be
needed today to yield that future sum at prevailing interest rates

‫ المبلغ المطلوب اليوم للحصول على هذا المبلغ المستقبلي بأسعار‬:‫القيمة الحالية للمبلغ المستقبلي‬
‫الفائدة السائدة‬
▪ Related concept:
The future value of a sum: the amount the sum will be worth at a
given future date, when allowed to earn interest at the prevailing rate

‫ عندما يُسمح‬، ‫ المبلغ الذي يستحقه المبلغ في تاريخ مستقبلي معين‬:‫ القيمة المستقبلية للمبلغ‬:‫المفهوم ذو الصلة‬
‫له بربح الفائدة بالسعر السائد‬
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use.
EXAMPLE 1: A Simple Deposit
▪ Deposit $100 in the bank at 5% interest.
What is the future value (FV) of this amount?
▪ In N years, FV = $100(1 + 0.05)N
▪ In three years, FV = $100(1 + 0.05)3 = $115.76
▪ In two years, FV = $100(1 + 0.05)2 = $110.25
▪ In one year, FV = $100(1 + 0.05) = $105.00
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for

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