ECON 102 1st Edition Lecture 20 Outline of Last Lecture 1 Terminology 2 Savings Investment Spending Identity a Simplified Economy b Open Economy Outline of Current Lecture I Loanable Funds Market a Demand Curve Shifts II Inflation and Interest Rates a Net Present Value Current Lecture The loanable funds market is a hypothetical market that examines the market outcome of the demand for funds generated by borrowers and the supply of funds provided Shifts of the Demand for Loanable Funds o Factors that can cause the demand curve for loanable funds to shift include Changes in perceived business opportunities Changes in beliefs about payoffs in investment spending Shift to the curve to the left Changes in the government s borrowing Budget Deficit leading to a shift of the curve to the right These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute The negative effect of government budget deficits on investment spending is known to economists as crowding out Anything that shifts either the supply of loanable funds curve or the demand for loanable funds curve changes the interest rate o Real interest rate nominal interest rate inflation rate Fisher Effect An increase in expected future inflation drives up the nominal interest rate leaving the expected real interest rate unchanged The interest rate can be used to compare the value of a dollar realized today with the value of a dollar realized later because it correctly measures the cost of delaying a dollar of benefit o The present value of 1 realized one year from now is equal to 1 1 r the amount of money you must lend out today in order to have 1 in one year It is the value to you today of 1 realized one year from now The net present value of a project is the present value of current and future benefits minus the present value of current and future costs
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