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

Illustrating the Demand for Loans Some Illustrations D r* 0

Illustrating the Demand for Loans People Become More Optimistic About the Future D r* 0

Illustrating the Demand for Loans People Become More Optimistic About the Future D r* 0 They consume more (i.e., they save less) They invest more

Illustrating the Demand for Loans People Become More Optimistic About the Future D r* The net demand curve shifts to the right. Interest rates rise r’ 0

Illustrating the Demand for Loans A Temporary Reduction in Income D r* 0 People reduce consumption by less than the drop in income, shifting the demand for loans to the right.

Illustrating the Demand for Loans A Temporary Reduction in Income D r* 0 There may be a reduction in investment, shifting the demand to the left.

Illustrating the Demand for Loans A Temporary Reduction in Income D r’ 0 If the net effect is a left shift, interest rates will fall r*

Illustrating the Demand for Loans Why Do We Care? D Interes t rate, r I r* r’ I’ I*

Illustrating the Demand for Loans Two Extensions Government Demands –The government almost never spends exactly what it takes in. Its transactions affect the supply and demand for loans.

Illustrating the Demand for Loans Two Extensions Government Demands –The government almost never spends exactly what it takes in. Its transactions affect the supply and demand for loans. The World Market –International lending is around $300 billion per year; international borrowing runs about $500 billion per year. We cannot neglect the international sector.

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