ECON-E 202 Lecture Notes - Lecture 21: Autarky, Inverse Relation, Interest Rate
Lecture 3/29/18
Final Review for Exam 2
Module 6: Loanable Funds
Recessions caused by financial crisis are deeper and longer
● Borrowers: Firms, Investors
● Lenders: Households
● Sources of borrowing: Direct-stock exchange
● Indirect-banks
Why is wall street important to the economy?
○ Redistributes financial capital from lends to borrowers
If Interest Rate rises, what will happen to Bonds Prices
○ They will fall.
○ Inverse relationship because if IR is high that means you see a large risk or
whatever so you don’t loan as much
■ If demand goes down price goes down and IR goes up because price
shrinks
● Bond Market
○ Backed by company assets
○ Municipal- federally tax exempt, issue by cities
○ Source of external Funds
● Bond Interest rate
Coupon Payment
Principal
Stock-partial ownership
● Market Info-
○ What stocks and bonds provide through the change in their values
○ Higher bond price (people have more money so are optimistic and will lend more
with a lower interest rate)
Mutual Funds
○ Buy into a portfolio
○ Allows ppl with less money to easily diversify
Banks
○ Take deposits from SAVERS and gives loans to borrowers
GDP=C+I+G+NX
○ We generally operate in a closed economy so NX=0 unless specified
Y-C-G=I=S
GDP-private spend-govt=national savings
S=(Y+TR-T-C) + (T-G-TR)
Private Public
Loanable Funds Model
● People’s savings= Supply curve
○ Upward sloping, the higher the Interest rate (y) the more willing HH’s are to put
away money for later
● Firm’s Investment=demand curve
○ Downward Sloping- the lower the interest rate the less it costs to invest so firms
want more (x)
What 3 variables are on the x axis of the LFM?
○ Saving, Investment, Quantity of Loanable Funds
● Changes in supply=affect people’s DI=wealth, taxes, future income
● Change in Demand=affect companies profit= future profits, productive tech, business
taxes, cash flower
○ When Demand increases, interest rate increases, both Supply & Demand
increases
Present Value
● Example: you get 50 rn and 50 every year for 3 years with 10% IR
50 + 50 +50 +50
(1+1.10)^1 (1+1.10)^2 (1+1.10)^2
Document Summary
Recessions caused by financial crisis are deeper and longer. Redistributes financial capital from lends to borrowers. If interest rate rises, what will happen to bonds prices. Inverse relationship because if ir is high that means you see a large risk or whatever so you don"t loan as much. If demand goes down price goes down and ir goes up because price shrinks. Municipal- federally tax exempt, issue by cities. What stocks and bonds provide through the change in their values. Higher bond price (people have more money so are optimistic and will lend more with a lower interest rate) Allows ppl with less money to easily diversify. Take deposits from savers and gives loans to borrowers. We generally operate in a closed economy so nx=0 unless specified. Upward sloping, the higher the interest rate (y) the more willing hh"s are to put away money for later.
