Professional Documents
Culture Documents
Determination of
Interest Rates
Chapter Objectives
Explain Loanable Funds Theory of Interest
Rate Determination
Identify Major Factors Affecting the Level of
Interest Rates
Explain How to Forecast Interest Rates
Investment spending
Interest sensitive consumer spending such as housing
Security prices vary inversely with interest rates
Varying interest rates impact retirement funds and retirement
income
StatesBorrow
assets
Quantity of funds demanded depends on how
many projects to be implemented
Businesses
NPV = INV +
t=1
CFt
(1 + k)t
D
Quantity of Loanable Funds
Interest
Rate
Demand
DA = Dh + Db + Dg + Dm + Df
Aggregate
Supply
SA = Sh + Sb + Sg + Sm + Sf
In equilibrium, DA = SA
Graphic Presentation
Interest
Rates
Supply of
Loanable Funds
Demand for
Loanable Funds
Graphic Presentation
When
Surplus-
Economic Growth
Expected
Inflation
The
Fisher Effect
Nominal
in = ir + E(I)
Annualized
Inflation
Annualized
T-Bill
Rate
10
-5
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Inflation
If
Households
Money Supply
When
Foreign Flows
In