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What determines interest rates? https://www.youtube.com/watch?v=GHHesANT6O…
What determines interest rates?
https://www.youtube.com/watch?v=GHHesANT6OM
Loanable funds theory
Interest rate is determined by the supply and demand of loans
In the market there are
savers
investors
In this market the interest rate is the price by which fonds are sold
The loan's demand determines the total investment in an economy
A higher real interest rate will reduce investment and after all reduce the quantity of loans demanded, and viceversa.
The loan's supply is equal to the levels of saving plus capital inflows minus capital outflows
Capital inflows are funds provided to a country’s investors by foreigners
Capital outflows are funds provided to foreign investors by a country’s savers
A higher interest rates increases the level of savings, and capital inflows but reduces the capital outflows.
The ex ante real rate: the nominal interest rate minus expected inflation over the loan period
Determinants of interest rates in the loanable funds theory
Curves shift due to savings, investments and capital flow.
Shifts in investment
With r constant, the things that make investment shift are new technologies and changes in investors' confidence level
With high investment the demand curve shifts to the right (r increases) and viceversa.
Savings
What shifts the supply curve is the changes in private savings and the changes in government budget.
Increases in savings shifts the supply curve to the right
Private saving
Public saving
Capital flight
Sudden reduction of capital net flow caused by the reduction of the confidence levels of foreigners in a country's economy.
Capital flow
Changes in the trust levels of foreign savers and changes in foreign interest rate.
it causes shifts in the supply curve
Liquidity preference theory
https://www.youtube.com/watch?v=yz1G-e1ks98
the nominal interest rate is determined by the supply and demand for money
Money is a medium of exchange, and bonuses pay for interes
Is the demand for money which is the most liquid asset
The theory talks about the money market
The supply of money controlled by central banks
The demand of money which depends on the amount of money people decide to have.
People divide their wealth in bonus and money
With a higher nominal interest rate it is better to invest in bonuses than to have money
With higher nominal interest rates the demand of money lowers
Shifts in nominal interest rate are caused by movements of the supply curve and central bank decisions
Shifts in the demand curve are caused by changes in aggregated expenditure and in technological transactions
Hecho por Daniel Bayter
