(solution) † 2. Which is correct, and explain: The annual rate of interest is the ratio P 0 / P 1 , the

(solution) † 2. Which is correct, and explain: The annual rate of interest is the ratio P 0 / P 1 , the

† 2. Which is correct, and explain: The annual rate of interest is the ratio P 0 / P 1 , the price of a current consumption claim divided by the price of a consumption claim dated one year in the future. The annual rate of interest is the premium on the value of current relative to 1-year future claims, as given by the expression ( P 0 / P 1 ) − 1. What is wealth? How does it relate to current and future incomes?