Can’t the Governtment Print more money?
An interesting question that is even more interesting these days with the credit crisis. Chat about it in the forum: why not just print more money?
NPV and Interest Rates for Discount Purposes
Net Present Value and Sensitivity to Interest Rates
This post continues a discussion about cash flow and net present value which you can read by clicking on the specific links. This post deals with a major factor on NPV which is the fluctuating interest rate. This variable can change outlook in a hurry.
The NPV (net present value) of any project is very sensitive to the interest rate used for discounting cash flows (costs, which usually occur at time 0, are not discounted, while cash inflows closer to the end of the project are heavily discounted). Therefore choosing the appropriate interest rate is very important.
The interest rate used for discounting should equal the opportunity cost of money / capital which is:
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DiscussEconomics New Blog Design
Welcome to DiscussEconomics, if you've been here before you've noticed that we've changed our blog to a more 'newspaper' feel than the old blue (which you can still view in the Forum). Please let us know what you think, give us your thoughts, and let us know if there are any bugs you've encountered. Thanks!
The Net Present Value of Cash Flow
We started a discussion on the importance and description of cash flow for the operating firm. You can find that post here: cash flow intro.
Moving forward now to the topic of net present value of cash flow (or NPV). An investment project generally should be undertaken if benefits outweigh costs. In order to compare the two categories we must convert them first to the same time period by finding their present value. If the PV of benefits is greater than the PV of costs the project is profitable.
Usually the costs of the project incur in year 0 while benefits incur in years 1 to t. The difference between the PV of benefits and costs is called net present value (NPV). If we denote with Ao the initial cash flow (negative if it is a cost, positive if it is revenue) and with AI, ... , At all the future cash flows, the net present value of the project is:
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Money Creation - Where Does the Money Come From?
How Banks Create Money continued
One of our popular posts located here talks about 'how banks create money'. You should read that link before this one as it is the necessary part 1 of this series on money creation. A lot of people think it's a huge conspiracy that banks would create money out of thin air. Fact is they don't, and our entire financial system is based upon the responsibility of banks to lend correctly. Furthermore, in the capitalist system, in the simplest form, the troubled banks would be permitted to fail and close its doors, however, because most nations aren't true capitalists economies (free market) because of the intervention of the central bank, you'll note that the government through the central bank is doing more to ensure consumer confidence is settled by the guarantee of loans in banks and the banks themselves.
Here are some notable comments from the previous article on How Banks Create Money that are worthy to be posted in article form (from Keir in the UK.) we've had folks from all around the world respond to this post so please feel free to comment.
Keir notes:
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Terms and Conditions of Loans and Mortgages
Terms and Conditions of Loans and Mortgages - Excel
Loans are among the most significant financial transactions involving interest. Loan represents a contract between a borrower and lender. The borrower is provided by the lender with an amount of money, which is repaid later, and on which the interest is paid. Mortgage is generally a long-term loan used primarily for the purpose of purchasing a piece of property such as a home. The real estate property serves as a security for the repayment of the loan and the payment of the interest.
To make the best loan decision, one has to consider many factors. The key factors are: amortization, term of the loan, interest rate, payment schedule, prepayment privileges. Here are some definitions for these words. Read the rest of this entry »
Project Evaluation - Cash Flow Analysis Intro
Cash flow analysis is one of the most important pieces of financial information for a firm. Before approving a loan banks analyze the cash flow of firms to decide whether the companies have the ability to repay a loan. As well, the cash flow analysis before an investment project is crucial in order to decide whether the project should be undertaken or not. If the banks ignore this type of analysis, among others, you wind up with the problem seen in the current credit crisis around the globe.
What is cash flow? Simply, the cash flow is the difference between the amount of dollars that enter the firm and the amount of dollars that exit the firm.
There are different types of cash flow, but for the purpose of this course it is enough if we treat all of them equally. Basically the cash flow in our examples will summarize the total cash result from all the transactions a firm is involved in during a year. The activities that bring cash are considered sources of cash and they result in cash inflows (revenues). The activities that spend cash are called uses (or applications) of cash. They will result in cash outflows (costs). The difference between cash inflows and cash outflows during a period will be the net cash flow (or sometimes simply cash flow).
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New Blog Category - Finance
Just a heads up that within a week a new category will be hitting the DiscussEconomics blog -- Finance. Dealing specifically with aspects of business finances, this category will house some discussions on topics like cash flow, NPV, IRR, and more. Also included will be some applications to use in Excel (for those who are really interested....) Stay tuned for our updates. Be sure to add us to your favorite news readers as well since our updates happen almost daily.
How the Demand Curve is Consistent with the Quantity Theory of Money
The AD curve is consistent with the quantity theory of money.
The expansino shifts the AD schedule from AD to AD1. I nthe very short run, if the price level were to remain at the Po, the economy would move to point E1. This would cause excess demand in the goods and labour markets, which would in turn force up wages and prices. Read the rest of this entry »
Deriving the Aggregate Demand Curve
Check out this graph:
For a given nominal money stock, a price level decrease increases the real money stock. This shifts the LM curve outward, and the interest rate goes down and income increases. Therefore, along the AD curve, a price level decrease )holding the nominal money stock constant) is consistent with an income increase, and the AD curve slopes downward.
