FI 301 Lecture Notes - Lecture 2: Aggregate Demand, Inverse Relation, Money Supply
Document Summary
Loanable funds theory: suggests that the market interest rate is determined by the factors that control the supply of and demand for loanable funds. Movements in the general level of interest rates in a particular country. Why interest rates among debt securities of a given country vary: household demand: Inverse relationship between the interest rate and quantity of loanable funds demanded: more demand, higher interest rate; less money to loan banks choose more closely who to lend too: business demand: Expansion= people, inventory, equipment, real estate: government demand: borrows money when they run a budget deficit. Government is interest inelastic meaning the interest rate does not affect them. Borrow money by issuing bonds: foreign demand: May borrow from a foreign country because of differences in interest rates. Impact: much less than others because they will borrow from own country. Aggregate demand for loanable funds: the sum of the quantities demanded by the separate sectors at any given interest rate.
