Textbook Notes (362,789)
United States (204,231)
Economics (69)
ECON 2035 (13)
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Chapter 4

Chapter 4 What Determines Interest Rates (aced the test and got 96%)

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Louisiana State University
ECON 2035

Chapter 4Loanable Funds Framework looks at what affects the real interest rate Demand for loansInvestment Supply for loansexcess surplus for funds savingoSaving PrivatePublicNet Capital InflowCapital flowsinternational flow Capital outflow domestic saver investing in a foreign investment Capital Inflow foreign saver investing in a domestic investment Net Capital Inflowcapital inflowcapital outflow Productivity and costProductivity yLLlabor hourschange in productivity is whats important changeYchangeLComing out of a recession productivity growth increasesInflation rates rise when productivity rates dont keep up with GPD increases Loanable Funds FrameworkDemands for loans investmentIf the interest rate goes up demand goes downdownward sloping demand curveSupply of loansprivates savingspublic savingnet capita inflationInterest rate goes upsaving Capital outflows funds that US investors would want invest in abroad vCapital inflows Net capital inflow shouldFactors that effect investment shift in demandTechnology changesInvestor confidenceFactors that effect investment shift in supplyPublic savingtax revenuegov spending Two things that effect net capital inflowsForeign investor confidenceoCapital Flight when foreign investors pull out of investments Big INCREASE in capital outflowsnet capital inflows will DECREASE The supply will DECREASE and interest RISE Foreign interest RateoForeign interest rate INCREASESforeign investments will INCREASE so outflow will INCREASEthe level of inflows go DOWN The domestic real interest rate will INCREASELoanable funds frame work is designed to look at long run changes in interest rates But changes in the nominal interest short run change Fisher equation ireFisher EffectsoExpected inflation rate INCREASES prices rise faster than in the futureNominal interest rate INCREASELiquidity preference frame workfocuses in nominal rate oWealth money mbonds b Money earns no interest i0 Bonds do earn interest oSupply of wealth mSbS oDemand for wealth mDbDoDemand of wealth Portion of money demand that you want to hold as money
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