Essay Revision Q3 Flashcards
How is the level of interest rates determined?
There are many different interest rates on offer in the financial market.
They can depend on if you are a borrower or lender of funds.
Generally the LEVEL of IR refers to the aggregate IR.
There are a few approaches to determine this. The most popular is the LOANABLE FUNDS THEORY
What is the LOANABLE funds theory?
The interaction between the demand for and supply of LOANABLE funds.
The business and government sectors have high demand for funds. The government generally need the funds regardless of the IR.
The supply has 3 principle sources:
- households
- changes in the money supply (amount of money in the economy)
- dis hoarding ( where money not kept in financial institutions, suddenly is)
What are the 4 different perspectives of interest rates?
The cost of borrowing funds
The rate of return for lending funds
The opportunity cost of holding (hoarding) money
The time value of money.
