Beruflich Dokumente
Kultur Dokumente
Two Markets
Loanable Funds Market
Determines Interest Rate in Capital Markets
Liquidity Market
Determines Money Market Rate
Map the relationship between the interest rate and the quantity of funds that are lent.
Supply curve represents the behavior of savers & lenders Demand curve represents the behavior of borrowers
r
D
r* LF* LF
Savings
We divide savings into 2 parts: SGovernment + SPrivate = S Public Saving/Government Saving (Budget Surplus) Private Saving (Household + Business Saving) National Saving
r* LF* LF
Global Economy
Additional Source of Savings Loanable Funds Supply = Public Savings + Net Capital Inflow from Abroad Two Effects
1. Supply Curve Becomes More Elastic More globalized, more elastic 2. Global Financial Markets also a source of shifts in Supply Curve
Questions
Compare Investment Boom in a very globalized economy with one in a less globalized economy. What happens to investment & interest rates?
Money Markets
Liquid Assets
Two kinds of assets 1. Liquid Assets (Currency, Checking Accounts, Savings Accounts) that are useful for transactions which pay zero or below market interest rates. 2. Money market assets (Government bills, commercial paper, jumbo CDs) that pay a market rate, i, but which cannot be used for transactions
Liquidity Demand
Q: Why does the money demand curve slope down? A: The greater is the market interest rate, the greater is the opportunity cost of holding money. Q: What shifts the money demand curve? A: An increase in GDP will increase the need for money for transactions shifting the demand curve out. A reduction in GDP will shift the demand curve in.
Money Supply
Supply of monetary assets governed by central bank. 1. Prints currency 2. Makes reserves available to banks 3. Governs fraction of deposits that banks must keep.
Money Market
Money Demand Money Supply
i
i*
Federal Funds Rate Uncollateralized Call Money Rate Main Refinancing Rate Overnight Call Rate Official Bank Rate
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
C.P. Rate
Fed Funds
T-Bill 3 Mo
CEIC Database
Sep-05
Mar-06
Money Supply
Government can control the money supply and can shift the curve in or out by decreasing or increasing money supply. What does the central bank need to do to money supply to increase the interest rate?
i*
i**
3 M
Learning Outcomes
Students should be able to: Use the Loanable Funds model to analyze the effects of external events on savings, investment, and real interest rates in capital markets and; Compare capital markets in globalized economies with those in closed economies. Use the money supply and demand model of money markets to examine the effect of changes in the economy on money market rates and; Characterize the effects of changes in monetary policy