16. Equilibrium and Time

Two-period interest determination and overlapping generations — present-value budgets, credit market clearing, and the infinite-horizon warning.

• Intertemporal Equilibrium and the Interest Rate — Watch a market that trades today's share against tomorrow's share. The interest rate is the price of that swap. A 🧑 person with plenty today lends the spare share out. A person short today borrows, spends now, and repays tomorrow. The rate settles where the borrowing meets the lending. The formula below is the exchange rate between today's 💰 money and tomorrow's. For example, one friend receives the full 10,000 won allowance this month. She lends 5,000 won to a friend who is short this month. Next month she receives 5,500 won back, interest included. The lender spends less today and the borrower spends more.
• Overlapping Generations and the Golden Rule — See life in generations: earn while young, spend while old. The young generation and the old never actually meet. The young generation has plenty and the old generation has little. Their lifetimes never overlap, so they cannot trade directly. 💰 Money builds the bridge between them. The young trade goods for money, and spend that money when old. For example, a grandfather sold 🍚 rice for money when he was young. Now old, he buys rice from a young farmer with that money. When that farmer grows old, he will buy from the next generation. This is how money links the generations.