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Chapter 2 The Determinants of Interest Rates: Competing Ideas

 Learning Objectives  ,[object Object],[object Object],[object Object]

Introduction ,[object Object],[object Object]

Introduction ,[object Object],[object Object],[object Object]

Functions of the Interest Rate in the Economy ,[object Object],[object Object],[object Object]

Functions of the Interest Rate in the Economy ,[object Object]

Functions of the Interest Rate in the Economy ,[object Object],[object Object]

The Classical Theory of Interest Rates ,[object Object],[object Object],[object Object]

The Classical Theory of Interest Rates ,[object Object],[object Object],[object Object],[object Object]

The Classical Theory of Interest Rates ,[object Object],[object Object],Interest Rate Current Saving  r 1 S 1  r 2 S 2

The Classical Theory of Interest Rates ,[object Object],[object Object],The Demand for Investment Funds … continued ,[object Object]

The Classical Theory of Interest Rates ,[object Object],A 15% B 12% C 10% D 8% E 7% Dollar Cost of Investment Projects Expected Internal Rates of Return on Alternative Investment Projects Cost of Capital Funds = 10% C 10% D 8% E 7% – acceptable – acceptable – indifferent unprofitable unprofitable

The Classical Theory of Interest Rates ,[object Object],[object Object], r 2 Interest Rate Investment Spending  r 1 I 1 I 2

The Classical Theory of Interest Rates ,[object Object],Interest Rate Savings & Investment r E Q E  Investment Savings

The Classical Theory of Interest Rates ,[object Object],Limitations … continued

The Liquidity Preference (Cash Balances) Theory of Interest Rates ,[object Object],[object Object]

The Liquidity Preference (Cash Balances) Theory of Interest Rates ,[object Object],[object Object],[object Object],[object Object],[object Object]

Speculative Demand for Money or Cash Balances

The Total Demand for Money or Cash Balances And the Equilibrium Rate of Interest

The Liquidity Preference (Cash Balances) Theory of Interest Rates ,[object Object],[object Object],Interest Rate Quantity of Money / Cash Balances Equilibrium interest rate  Total Demand Q E Money Supply

The Liquidity Preference (Cash Balances) Theory of Interest Rates ,[object Object],[object Object],[object Object]

The Loanable Funds Theory of Interest ,[object Object],[object Object],[object Object]

The Loanable Funds Theory of Interest ,[object Object],[object Object],[object Object],[object Object],[object Object]

The Loanable Funds Theory of Interest ,[object Object],Interest Rate Amount of Loanable Funds Total Demand = D consumer + D business + D government + D foreign

The Loanable Funds Theory of Interest ,[object Object],[object Object],The Supply of Loanable Funds … continued

The Loanable Funds Theory of Interest ,[object Object],Interest Rate Amount of Loanable Funds Total Supply = domestic savings + newly created money + foreign lending – hoarding demand

The Loanable Funds Theory of Interest ,[object Object],Interest Rate Amount of Loanable Funds r E Q E  Demand Supply

The Loanable Funds Theory of Interest ,[object Object]

Changes in the Demand for and Supply of Loanable Funds

The Rational Expectations Theory of Interest ,[object Object]

The Rational Expectations Theory of Interest ,[object Object],Interest Rate Amount of Loanable Funds r E Q E  Expected Demand Expected Supply

The Rational Expectations Theory of Interest ,[object Object],[object Object]

Expected Demand for and Supply of Loanable Funds

The Rational Expectations Theory of Interest ,[object Object],[object Object],[object Object],[object Object]

Chapter Review ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Chapter Review ,[object Object],[object Object],[object Object],[object Object],[object Object]

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