FINS1612 Lecture Notes - Lecture 9: Financial Market Participants, Money Supply, Business Cycle
Document Summary
Central bank may increase interest rate if there is: Inflation above target range: excessive growth in gdp, a large deficit in the balance of payments (bop, rapid growth in credit and debt levels, excessive (cid:494)downward(cid:495) pressure on foreign exchange markets. 3 effects of changes in interest rates: liquidity effect, the effect of the rba(cid:495)s market operations on the money supply and system liquidity, e. g rba increases rates (ie. tightens monetary policy) by selling commonwealth. Government securities take money out of banks: income effect, a flow-on effect from the liquidity effect. Alternatively, macroeconomic uses demand and supply of money to explain rates. 2 sectors: business demand for funds (b, short-term working capital, longer-term capital investment, govt. demand for funds (g, finance budget deficits and intra-year liquidity. Govt. is less sensible to interest rates than businesses (if they need to borrow, they will borrow regardless of interest rate) Equilibrium in the loanable funds market where supply and demand curves cross.
