Capital

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Capital Wealth

• Discussion of past-paper

• 1991 C7

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• Gold was found in California in 1848, and the
  famous gold rush was on. It was reported that
  gold miners thought that they would become very
  rich in the future, although the actual incomes
  they earned were, at least in the beginning, very
  small. California at that time was isolated from
  the east coast of the United States because the
  transcontinental railroad was not yet built.

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CALIFORNIA
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• (a) What would you expect the effects to be upon
  the real rate of interest when the gold rush
  began? Explain. (9 marks)
• What would the effects of the change in interest
  rate be upon the consumption behaviour of the
  gold miners and other citizens in California?
  Explain. (8 marks)
• (c) What would the effects be upon the interest
  rate and consumption pattern in California after
  the transcontinental railroad was built a few
  years later? Explain. (8 marks)

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• (a) What would you expect the effects to be upon
  the real rate of interest when the gold rush
  began? Explain. (9 marks)

• With the expected sharp rise in wealth, gold
  miners tended to consume more.

• With their relative low actual incomes they
  earned, they would borrow from non-miners to
  increase their current consumption.

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• (a) What would you expect the effects to be upon
  the real rate of interest when the gold rush
  began? Explain. (9 marks)

7

• (a) What would you expect the effects to be upon
  the real rate of interest when the gold rush
  began? Explain. (9 marks)

• With the expected sharp rise in wealth, gold
  miners tended to consume more.

• With their relative low actual incomes they
  earned, they would borrow from non-miners to
  increase their current consumption.

• Therefore, the real interest rate would be driven
  up.

• The rise in interest rate was intensified by the
  lack of a transcontinental railroad, which forced
  the miners to borrow from the local and small
  loan markets.

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• What would the effects of the change in interest
  rate be upon the consumption behaviour of the
  gold miners and other citizens in California?
  Explain. (8 marks)

• Because it was the miners who wanted to borrow
  for consumption and drove up the R, no matter how
  high the R was, they would consume more than if
  borrowing was not possible.

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• What would the effects of the change in interest
  rate be upon the consumption behaviour of the
  gold miners and other citizens in California?
  Explain. (8 marks)

Decrease in non-miners consumption
Increase in miners consumption
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• What would the effects of the change in interest
  rate be upon the consumption behaviour of the
  gold miners and other citizens in California?
  Explain. (8 marks)

• Because it was the miners who wanted to borrow
  for consumption and drove up the R, no matter how
  high the R was, they would consume more than if
  borrowing was not possible.

• On the other hand, the consumption of other
  citizens would fall. This is because without a
  similar expected rise in wealth, a higher R would
  discourage consumption.

• That is, non-miners loaned to miners, cutting
  consumption for the former and encouraging
  consumption for the latter.

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• (c) What would the effects be upon the interest
  rate and consumption pattern in California after
  the transcontinental railroad was built a few
  years later? Explain. (8 marks)

• The supply of funds in California would rise as a
  result of the construction of the
  transcontinental railroad.

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(c) What would the effects be upon the interest
rate and consumption pattern in California after
the transcontinental railroad was built a few
years later? Explain. (8 marks)
R2
Q2
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• (c) What would the effects be upon the interest
  rate and consumption pattern in California after
  the transcontinental railroad was built a few
  years later? Explain. (8 marks)

• The supply of funds in California would rise as a
  result of the construction of the
  transcontinental railroad.

• Funds from areas of lower R (eg. the east coast)
  would be transferred to California to earn a
  higher R, and this would drive down the R in
  California.

• The fall in R would lead to an increase in
  consumption generally.

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• Factor affecting the rate of interest

1. Time preference for earlier availability

• a greater time preference or stronger impatience
  will lead to a higher interest rate

• if it expects that the end of the world is
  coming soon, the interest rate will rise quickly

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• Factor affecting the rate of interest

2. Time endowment

• time endowment refers to peoples expectation of
  how much they could earn in the future

• if many people expect that their future income to
  be much higher than current income, the interest
  rate will be higher

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• Factor affecting the rate of interest

3. Time productivity

• it refers to the rate of return on investment

• interest rate tends to be higher in
  technologically progressive area or new
  settlement of territory where there are improved
  opportunities for investment

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• Factor affecting the rate of interest

4. Degree of isolation

• The interest rate in an area that is financially
  linked with other regions cannot diverge too far
  from the equilibrium rates in the outside world.