ECON350 Lecture Notes - Lecture 5: Loanable Funds, Nominal Interest Rate, Market Liquidity
Document Summary
The term structure of interest rates: theories of term structure, the importance of term structure theories to policymarker. This is a story of equilibrating saving and investment. Long run: we will reach the equilibrium: the "liquidity preference theory" (lft) was advanced by. Keynes in his general theory, suggesting that in a world of uncertainty people prefer to hold on to cash or liquidity. Swap between cash and illiquid asset such as bond. Loanable funds theory: the loanable funds theory says that interest is a real" concept determined at a level that equates the demand and supply of savings. In other words, it equates the decisions of savers and investors. Thus the planned investment line (the use of loanable funds" line) will be downward sloping. Of course, the reverse would apply if the real interest rate was above the average level of productivity of investment: non-interest changes in the desire to save and invest will cause shifts" in these two curves.
