Economics

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There are two kinds of risk aversion: Absolute and Relative. Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coefficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. On the other hand, relative risk aversion is absolute risk aversion times W, indicating initial Wealth. The higher the coefficient of relative risk aversion, the higher the relative risk premium. Two examples below would explain Absolute Risk Aversion based on microeconomics point of view.

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Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coefficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. On the other hand, relative risk aversion is absolute risk aversion times W, indicating initial Wealth. The higher the coefficient of relative risk aversion, the higher the relative risk premium. Two examples below would explain Relative Risk Aversion based on microeconomics point of view.

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Overview

– The Great Depression was a severe worldwide economic depression in the decade preceding World War II

– Two Big Shifts in Aggregate Demand: The Great Depression and World War II. From 1929 to 1933 (The Great Depression), GDP fell by 27 percent. From 1939 to 1944 (World War II), the economy’s production of goods and services almost doubled

– It started in 1930 and lasted until the late 1930s or middle 1940s. This period consists of a decline in economic activity (1929–33) followed by a recovery (1934–39). It was the longest, most widespread, and deepest depression of the 20th century.

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Small Open Economy with no trade

If there is no trade in the small open economy, equilibrium is determined by the tangency between the PPF and indifference curve for the representative consumer. In equilibrium, the slope of the PFF is equal to minus the price of good a relative to good b (see figure bellow).