The graph above shows a hypothetical loanable funds market. Currently the market is in equilibrium. Lenders...
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The graph above shows a hypothetical loanable funds market. Currently the market is in equilibrium. Lenders and borrowers expect the inflation rate for the next year to be 2 percent and the nominal interest rate is percent. Suppose that corporations expect better profit conditions in the future and, so, decide to borrow more $20 million more than before to invest in plants and equipment. At the same time, FDIC increases the amount of deposit insurance from $150,000 to $250,000 (as it did during the 2007-09 financial crisis). This reduces the credit risk for households and, as a result, more households keep their savings in their bank deposit accounts. The increase in the amount of bank deposits enables banks to lend more money to business firms and households. The amount of loanable funds supplied increases by $40 million. Because of these two events, the ex-ante real rate changes to 4 percent. Ex-Ante Real Interest Rate 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% DLF SLF $0 $10 $20 $30 $40 $50 S60 $70 $80 $90 $100 $110 $120 $130 $140 Quantity of Loanable Funds (SMillion) The graph above shows a hypothetical loanable funds market. Currently the market is in equilibrium. Lenders and borrowers expect the inflation rate for the next year to be 2 percent and the nominal interest rate is percent. Suppose that corporations expect better profit conditions in the future and, so, decide to borrow more $20 million more than before to invest in plants and equipment. At the same time, FDIC increases the amount of deposit insurance from $150,000 to $250,000 (as it did during the 2007-09 financial crisis). This reduces the credit risk for households and, as a result, more households keep their savings in their bank deposit accounts. The increase in the amount of bank deposits enables banks to lend more money to business firms and households. The amount of loanable funds supplied increases by $40 million. Because of these two events, the ex-ante real rate changes to 4 percent. Ex-Ante Real Interest Rate 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% DLF SLF $0 $10 $20 $30 $40 $50 S60 $70 $80 $90 $100 $110 $120 $130 $140 Quantity of Loanable Funds (SMillion)
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Related Book For
Fundamentals Of Financial Management
ISBN: 9780273713630
13th Revised Edition
Authors: James Van Horne, John Wachowicz
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