Interest Rate Determination

INTRODUCTION

Today we will study how interest rates are determined using the models of the money market and the market for loanable funds. Click here to download a PowerPoint on this topic (Chapter 26 Notes Page and the Chapter 34 Notes Page).

Mini-lecture: Interest Rate Determination

HOMEWORK

Assignments

Read Mankiw (Chapters 26 - Section on "Market for Loanable Funds" and 34 - Section on "How Monetary Policy Effects Aggregate Demand") and watch the following videos.

ASSESSMENTS AND ACTIVITIES

Formative Assessment (MCQ's): You will take a formal assessment during class. The assessment will consist of multiple-choice questions and one FRQ from an old AP Exam. Doing the problem of the day and ensuring that you understand it will help you prepare for today's formative assessment and help to ensure that you understand the concepts in this lesson.

Problem of the Day

    1. Explain how the supply of money is determined (money market).

    2. Explain why the money demand curve slopes down (money market).

    3. Explain why the supply of loanable funds is upward sloping (market for loanable funds).

    4. Explain why the demand for loanable funds is downward sloping (market for loanable funds).

    5. Assume the government employs an expansionary fiscal policy:

      • Use a graph of the money market to show the effect of this policy on the nominal interest rate.

      • Use a graph of the market for loanable funds to show the effect of this policy on the real interest rate.

Can't figure out when to use the money market and when to use the loanable funds market?