it's about Interest and Foreign Exchange Rate.

1. GROUP MEMBER NAMES:
 Muhammad Asad Siddiqui (59523)
 Maaz Rasheed
TOPIC NAME:

3. QUOTATION BASES FOR INTEREST RATES
Rates on U.S Treasury Bills:
Quoted Rate: 360/No of Days x Dollar amount of Interest/Maturity value of
the Treasury Bill
Rates on Government of Canada Treasury Bills:
Quoted Rate: 365/No of Days x Dollar amount of Interest/Current price of
Treasury Bill

4. APPLYING ANALYSIS OF SUPPY AND DEMAND FOR VARIOUS CONCEPTS
Shifts in Bond Demand
Increase in Bond Demand: DB (Rightward shift in Demand for Bonds)
DB  i*
Decrease in Bond Demand: DB (Leftward shift in Demand for Bonds)
DB  i*

5. Shift in Bond Demand :
Expected Inflation (e),
e  DB  i*
Shifts in Bond Supply:
Increase in Bond Supply: SB (Rightward shift in Supply of bonds)
SB  i*
Decrease in Bond Supply: SB (Leftward shift in Supply of bonds)
SB  i* 

6. Dual Effects:
Liquidity Effect:
Fed buys more bonds  DB  i*
Expected Inflation Effect:
Expansionary policy  e  i*

7. Loanable Funds Theory
The Loanable Funds Theory suggests that the market interest rate is
Determined by the factors that control supply of and demand for
loanable funds.
Demand for Loanable Funds:
1. Household demand for loanable funds
a. Households demand loanable funds to finance housing expenditures as
well as the purchase of automobiles and household items.
b. Inverse relationship between the interest rate and the quantity of loanable
funds demanded.

8. 2. Government demand for loanable funds:
Governments demand loanable funds when planned expenditures are not covered by
incoming revenues.
Government demand is said to be interest inelastic: insensitive to interest rates.
Expenditures and tax policies are independent of the level of interest rates.
Analysis of Supply and Demand for Credit:
Interest Rates reflect the cost of credit (borrowing).
The movement of interest rates is determined by Supply of Credit and the Demand for
same.
Interest rates are positively affected by inflationary expectations (in a free and efficient
market):
Inflation ↑ Rates ↑
Interest rates are also affected by risk perceptions.

9. FACTORSTHAT AFFECT INTEREST RATE
• Impact of Monetary Policy on Interest Rates:
When the Fed reduces (increases) the money supply, it reduces
(increases) the supply of loanable funds, putting upward (downward)
pressure on interest rates.
• Impact of the Budget Deficit on Interest Rates:
Crowding-out Effect: Given a certain amount of loanable funds
supplied to the market, excessive government demand for funds tends
to “crowd out” the private demand for funds.
• Impact of Foreign Flows of Funds on Interest Rates:
Interest rate for a certain currency is determined by the demand for
funds in that currency and the supply of funds available in that
currency.

10. General Conclusions about Interest Rates:
Many factors (not just the Federal Reserve) change interest rates.
Interest rate movements tend to be procyclical, or vary positively with
the growth the economy.