ECON-200 FA4 Lecture Notes - Lecture 11: Real Interest Rate, Payroll Tax, Sherman Antitrust Act

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fuchsiacamel933

17 Jan 2016

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Interest rate that only compensates the lender for their willingness to forgo their money until it"s paid. 20 - what is the loanable funds theory of interest. Equilibrium interest in a loan market is determined by the demand and supply of funds. Increase in supply = lower equilibrium interest rate. Increase in demand = higher equilibrium interest rate. 1$ today is worth more than 1$ tomorrow. Interest on that 1$ for 1 day > no interest. Fv = amount to which a current amount will grow through interest. Pv = current value of some money payment to be received later. 22 - connection between interest rates and investment and r&d. Equilibrium interest rate influences the level and rations resources between investments. Real interest rate = purchasing power adjusted for inflation. 23 - per capita living standards in the us are high. Higher living standards = bigger consumption of resources. Debate over whether our demand will outstrip the supply or not.

Related Questions

Interpret the following graph showing the potential changes in supply of money compared to the demand for money. The demand for money is represented by line MD and the initial supply of money is represented by line MS. Then answer the questions below.

Change in Interest Rates

Find the new equilibrium points

1. If there is no change in the interest rates, where is the equilibrium point? What is the interest rate?

2. If there is a decrease in the supply of money, where is the new equilibrium point? What is the interest rate?

3. If there is an increase in the supply of money, where is the new equilibrium point? What is the interest rate?

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a. If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b. The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macro economy.

c. A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d. The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e. Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.

pinkfly212

Using the graph and definitions below of the supply of loanable funds, SLF, and the demand for loanable funds, DLF, discuss the following:

a. What is meant by the equilibrium nominal rate of interest?

b. Illustrate and discuss how an autonomous increase in the expected rate of inflation will change the equilibrium nominal interest rate. Express your discussion in terms of the effect on the supply and demand for loanable funds. Consider an initial real rate of interest of 3 percent and an expected inflation rate of 3 percent. If the expected rate of inflation rises to 4 percent with the real interest rate constant, what would the resulting nominal interest rate become in equilibrium using the Fisher relationship? Assume that investors believe the rise in the expected rate of inflation will remain at the higher level indefinitely.

c. Starting from an equilibrium position as in a, discuss the effects of a tightening monetary policy if the markets believe that a Fed tightening will lower future (next period) inflation. How might a recession occur under this scenario? HINTS: Recall the Fisher relationship where (1+i) = (1+r)(1+pe), where i is the nominal interest rate, r is the required real rate of return before taxes, and pe is the expected rate of inflation.

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ECON-200 FA4 Lecture Notes - Lecture 11: Real Interest Rate, Payroll Tax, Sherman Antitrust Act

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