Determination of Interest Rates参考.ppt

2.3 Economic Forces That Affect Interest Rates Money Supply (focus on supply of) When the Fed increases the money supply, it increases supply of loanable funds Places downward pressure on interest rates Explain the examples (Weak Economy in 2001-2002, Impact of 9.11) 2.4 Economic Forces That Affect Interest Rates Federal Government Budget Deficit (focus on demand for) Increase in deficit increases the quantity of loanable funds demanded Demand schedule shifts outward, raising rates Government is willing to pay whatever is necessary to borrow funds, “crowding out” the private sector 2.4 Economic Forces That Affect Interest Rates Crowding out Effect An economic theory explaining an increase in interest rates due to rising government borrowing in the money market. ? Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt crowds out private companies and individuals from the lending market. Increased government borrowing tends to increase market interest rates. The problem is that the government can always pay the market interest rate, but there comes a point when corporations and individuals can no longer afford to borrow. 2.5 Economic Forces That Affect Interest Rates Foreign Flows (Exhibit 2.16) In recent years there has been massive flows between countries Driven by large institutional investors seeking high returns They invest where interest rates are high and currencies are not expected to weaken These flows affect the supply of funds available in each country Investors seek the highest real after-tax, exchange rate adjusted rate of return around the world Summary of Forces that affect Interest Rates Economic conditions---supply of funds provided by households and demand for funds by all sectors Fiscal policy (tax policy)---level of disposable income so affect supply of funds and indirectly affected demand for funds Fed monetary policy---supply of funds and indirectly affected demand for funds