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Behavior Of Interest Rate - Coggle Diagram
Behavior Of Interest Rate
Difference between rate of return and interest rate
Differences
Based on the interest paid on a loan or deposit
Based on the nature of investment
Nominal Interest rate
Determined based on the interaction between the demand for and the supply of the bond in the bond market
Nominal interest rate does not take inflation into account
It is unadjusted for inflation
Money and Interest rate
A rising price level will raise interest rates because people will expect inflation to be higher over year
Expected inflation effect persists only as long as the price level continues to rise
Real interest rate
Nominal Interest rate - inflation
Interest rate that has been adjusted to remove the effects of inflation
It reflects the rate of an investment for current goods over future goods
Rate of return
Gain or loss of an investment over a specified period of time
Classical Model
Factors that shift the demand and supply for bonds
Supply Curve
Profitability of investment increase, s shift right
Expected inflation increase, s shift right
Government deficit increase, s shift right
Demand curve
Risk increase, D shift Left
Wealth increase, D shift right
Expected inflation increase, D shift left
Liquidity increase, D shift right
Keynesian model
When there is excess supply of money in the money market, interest rate is higher than its initial equilirium
The price of the bond in the market will decrease
wealth is stored of assets, in which consist of money and bond