COMMERCE 2FA3 Chapter Notes - Chapter 1: Loanable Funds, Nominal Interest Rate, Real Interest Rate
22 Sep 2017
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Document Summary
The primary purpose of financial markets is the transfer of funds from those with excess to those with insufficient. Those with excess funds are called surplus units, while those with insufficient can be termed deficit units. Financial markets are important in that they allow households to redistribute consumption opportunities over time. All projects that can earn more than the rate at which they borrow should go ahead, but if they earn less than the rate that they borrow at, they should not. An interest rate is a price: it is the price of resources today in terms of resources that must be paid at some future date. Interest rate determination can be viewed using the standard supply-demand analysis of microeconomics. The supply of loanable funds is logically positively related to the rate of interest. The greater is the reward for supplying capital, the greater will be the amount supplied.
