Chpt 2: Determination of Interest Rates

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4 Terms

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The Loanable Funds Theory

  • Suggests that the market interest rate is determined by the factor that control supply of and demand for loanable funds

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What can the Loanable Funds Theory be used to explain?

  • Movements in the general level of interest rates in a particular country

  • Why interest rates among debt securities of a given country vary

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<p>Household Demand for Loanable Funds</p>

Household Demand for Loanable Funds

  • Households demand loanable funds to finance housing expenditures as well as the purchase of automobiles and household items.

  • Inverse relationship between the interest rate and the quantity of loanable funds.

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<p>Business Demand for Loanable Funds</p>

Business Demand for Loanable Funds

  • Businesses will demand a greater quantity of loanable funds at a given point in time if interest rates are lower.