1. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. CHAPTER 9 Interest Rates and Why They Change

2. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-1 Major Factors Determining Nominal Interest Rates

3. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-2 Turkey’s Inflation Rate: 1988–2001 Source: International Financial Statistics, http://ifs.apdi.net/imf/about.asp (accessed May 25, 2006).

4. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-3 Real Loanable Funds Supply and Demand

5. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-4 Cause-and-Effect Relationships

6. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-5 Movement along the Real Loanable Funds Supply Curve

7. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-6 Causes of Real Money Supply Changes

8. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-7 Increases and Decreases in the Supply of Real Loanable Funds

9. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-8 Major Factors Affecting Households’ Supply of Real Loanable Funds *Remember that taxes have also affect the supply of real loanable funds through the government sector. Only the effect on the household sector is shown in this exhibit.

10. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-9 Major Factors Affecting Businesses’ Supply of Real Loanable Funds *Remember that taxes have also affect the supply of real loanable funds through the government sector. Only the effect on the business sector is shown in this exhibit.

11. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-10 Net Effect of a $100 Billion Tax Increase on the Supply of Real Loanable Funds

12. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-11 Major Factors Affecting Governments’ Supply of Real Loanable Funds

13. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-12 Major Factors Affecting the Foreign Supply of Real Loanable Funds

14. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-13 Major Factors Affecting the Real Money Supply

15. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-14 Summary of the Major Sectors and Factors Influencing the Supply of Real Loanable Funds

16. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-15 Movement along the Real Loanable Funds Demand Curve

17. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-16 Increases and Decreases in Demand for Real Loanable Funds

18. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-17 Summary of the Major Sectors and Factors Influencing the Demand for Real Loanable Funds

19. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-18 Equilibrium in the Real Loanable Funds Market

20. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-19 Effects of a Reduction in Real Government Budget Deficits

21. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-20 Euro-Area Real Interest Rates and Trend Line

22. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-21 Effects of an Increase in the Real Money Supply

23. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-22 Effects of Speculative Capital Outflows

24. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-23 Effects of Increased Real GDP on the Real Risk-Free Interest Rate

25. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-24 Determinants of Expected Inflation and the Real Risk-Free Interest Rate

26. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-25 Do Central Banks Control the Real Risk-Free Interest Rate?

27. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 9-26 Three Major Macroeconomic Markets

28. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-1 Perfectly Mobile International Capital Markets

29. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-2 Perfectly Immobile International Capital Markets

30. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-3 Short-Term, Nominal Interbank Interest Rate Target

31. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-4 Long-Term Nominal Interbank Interest Rate

32. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-5 Central Bank Discretionary Adjustment Factor (Premium/Discount)

33. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-6 Taylor Rule

34. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-7 Taylor Rule: Estimating the Taylor Rule for the United States, 1995–2006

35. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A9-8 Federal Reserve’s Target Federal Funds Rate and Taylor Rule’s Predicted Federal Fund Rate Source: Federal Reserve Bank of St. Louis, Economic Data—FRED, “Real Potential Gross Domestic Product,” http://research.stlouisfed.org/fred2/categories/118 (accessed May 27, 2006).