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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],[object Object]
The Classical Theory of Interest Rates ,[object Object],[object Object],[object Object]
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],[object Object],[object Object]
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]
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],[object Object]
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],[object Object],[object Object],[object Object],[object Object]
The Loanable Funds Theory of Interest ,[object Object]
Changes in the Demand for and Supply of Loanable Funds
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]
Chapter Review ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Ch05