Lectures in Macroeconomics- Charles W. Upton The Demand for Loans.

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Presentation transcript:

Lectures in Macroeconomics- Charles W. Upton The Demand for Loans

Saving r S Many things influence saving. We focus here on one: the interest rate.

The Demand for Loans Investment r D People also invest in productive projects. The demand for investment funds is a downward sloping function of the interest rate.

The Demand for Loans Investment r D

The Demand for Loans Why?

The Demand for Loans Why? If you have money out on loan at less than 20% or if you can borrow at less than 20%, undertake this project.

The Demand for Loans Why? If you have money out on loan at less than 15% or if you can borrow at less than 15%, undertake these projects.

The Demand for Loans Why? r=10%

The Demand for Loans Why? r=5%

The Demand for Loans Why? The lower the interest rate, the more attractive investment opportunities you will have, either to be financed out of your own funds or by borrowing.

The Demand for Loans Net Demand for Loans roro D S If the interest rate is r o, the amount a person wants to save exactly covers his investment

The Demand for Loans Net Demand for Loans roro D S If the interest rate is r 1, savings exceed investment, and our consumer will lend the difference to others.. r1r1

The Demand for Loans Net Demand for Loans roro D S If the interest rate is r 2, investment exceeds saving; our consumer will borrow the difference. r1r1 r2r2

The Demand for Loans Net Demand for Loans roro 0 D S

The Demand for Loans Net Demand for Loans roro 0 D S r1r1

The Demand for Loans Net Demand for Loans roro 0 D S r2r2

The Demand for Loans An Individual’s Net Demand roro 0

The Demand for Loans An Individual’s Net Demand roro When the interest rate is below r o, an individual is a net borrower r1r1 0

The Demand for Loans An Individual’s Net Demand roro When the interest rate is above r o, an individual is a net lender r2r2 0

The Demand for Loans An Individual’s Net Demand roro The “trick”: A saver is said to be a negative demander of loans. r2r2 0

The Demand for Loans Aggregate Net Demand J S 0

The Demand for Loans Aggregate Net Demand J S J+S r* 0

The Demand for Loans Points D r* The total demand for loans is found by adding up individual demands for loans. 0

The Demand for Loans Points D r* While individuals can be net borrowers or lenders, society cannot. Net demand must be zero. 0

The Demand for Loans The World Market D r* We assume that people cannot borrow or lend on the world market. We come to that later. 0

The Demand for Loans Drill Work D r* D’ r’ If investment goes up, the net demand curve shifts to the right. The interest rate goes from r* to r’. 0

The Demand for Loans More Drill Work D r* D’ r’ If saving goes down, the net demand curve shifts to the right. The interest rate goes from r* to r’. 0

The Demand for Loans Points This is not the theory of interest rates that newspapers spout

The Demand for Loans Points This is not the theory of interest rates that newspapers spout They would tell you that the Federal Reserve System meets and sets the rate.

The Demand for Loans Points This is not the theory of interest rates that newspapers spout They would tell you that the Federal Reserve System meets and sets the rate. –Not so. –It will take us some time to sort out this confusion.

The Demand for Loans End ©2003 Charles W. Upton. All rights reserved