knowledge
People choose between present consumption and saving money for future consumption. People lacking in patience tend to consume immediately rather than save money.
application
Give examples of present consumption and saving money for future consumption.
knowledge
Inflation causes a loss in the real value of currency and savings. Adjusted to the full effect of inflation, the effective interest rate equals to the difference between the nominal interest rate and the inflation rate.
application
Explain why people ask for higher nominal interest rates when there is a higher inflation rate.
knowledge
The effective interest rate is always positive because people ask for compensation for delayed consumption. The return on savings increases with the interest rate.
application
Explain why savings can be used to buy more commodities and services in the future.
knowledge
The nominal interest rate is a reflection on how fast the value of savings and investment increase. The effective interest reflects on how fast the purchasing power of savings and investment grows.
application
Explain the change in purchasing power with the annual inflation rate and the nominal rate given.
knowledge
When comparing the present and future value of the capital, people need to discount the future value according to the bank rate.
application
Suppose a ten-year-old child needs a one-year tuition eight years later. Calculate with a trial table how much money you need to deposit now.
knowledge
The government regulates and supervises financial institutions to guarantee the security, justice and order of the financial system.
application
Explain how the government regulates and supervises financial institutions.
knowledge
The government uses proper policies to encourage or discourage savings.
application
Explain why pension accounts and educational fund accounts can encourage people to save money.