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The Federal Reserve controls the amount of bank activity and thus influences a wide variety of interest rates. The government also has an impact on the lending process by granting special tax treatment for different types of interest. Loanable Funds Theory. Extending the model - PowerPoint PPT Presentation
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• The Federal Reserve controls the amount of bank activity • and thus influences a wide variety of
interest rates. • The government also has an impact on the
lending process • by granting special tax treatment for
different types of interest.
Loanable Funds Theory
• Extending the model• Financial institutions• Changes in supply
•Household thrift• Changes in demand
•Rate of return on investment
• Other participantsLO2 14-2
Supply Of Loanable Funds• In theory, supply and demand
applies• Supply in many forms
• Bank loans• Bonds• Stocks
• Economists disagree how much $ is actually available to loan • Many variables
Loanable Funds Theory
Quantity of Loanable Funds
Inte
rest
Rat
e (P
erce
nt)
0
D
S
i =8%
F0
The equilibrium interest rate
LO2 14-4
Time-Value of Money
• Money is more valuable the sooner it is obtained•Ability to earn interest•Compound interest
• Future value• Present value
LO3 14-5
Time Value of Money• Beginning Value Computation Total Interest End Value
• $1,000 year 1 $1,000 X 1.10 = $1,100 $1,000$1,100
• $1,100 year 2
• $1,210 year 3
LO4 14-6
Time-Value of Money
LO3
(1) (2) (3) (4)Beginning
Period Value Computation Total Interest End Period Value
$1000 (Year 1) $1000 X 1.10 = $1100 $100 $1100 (=$1000 + $100)
$1100 (Year 2) $1100 X 1.10 = $1210 $210 (=$100 +$110) $1210(=$1000 + $210)
$1210 (Year 3) $1210 x 1.10 = $1331$331 (= $100 + $110+
$121) $1331(=$1000 + $331)
14-7
Time Value of Money• Works in the other way• What is an anticipated
$1,000,000 in 2054 worth today?
• Go to • Free On Line Calculator Use
• Future Value of Money
LO3 14-8
The Price of Credit• Effective interest rates• Discounting a loan• Repaying a loan in installments• Effects of compounding• Truth in Lending Act 1968• Truth in Savings Act 1991• Fees and teaser rates• Let the borrower beware
LO5 14-10
Role of Interest Rates• Relationship to:
• Total output• Allocation of capital• R&D spending
• Nominal and real rates• Application: Usury Laws
• Nonmarket rationing• Gainers and losers• Inefficiency
LO3 14-11
Global Perspective
LO3 14-16