1. What happened to the nominal interest rate in this market?

2. Identify two possible causes of this

Supply

Demand

InterestRate

Loanable Funds

5%

$1,200

6%

$1,300

Real interest rate• Easy just ….• Real i = nominal i - CPI (or inflation rate)

• So in theory…..• Nominal rate 3.5 %, CPI: 3.5% OR• Nominal rate 8.5 %, CPI: 10 %

Graph on the white “boards”

Market conditions change so business increase capital spending

Fed buys $3 TRILLION worth of bonds during Open Market Operation

Consumers spend 5%, but economy is at “full employment”

Unemployment rate jumps from 6 % to 12%US government deficit spends

Paradox of thrift

Crowding out effect

Gov debt as a percent of GDP

Graph on page 571