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Ch. 5: Loanable Funds Theory

Ch. 5: Loanable Funds Theory. Demand & Supply of Loanable Funds DSU {demand} SSU {supply} Factors Affecting Demand Eco. Activity Gov’t. Deficit/Surplus Foreign Borrowers Inflation/Deflation. Factors Affecting Supply Federal Reserve Buy T-Bills – expand supply, interest rates down

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Ch. 5: Loanable Funds Theory

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  1. Ch. 5: Loanable Funds Theory • Demand & Supply of Loanable Funds • DSU {demand} • SSU {supply} • Factors Affecting Demand • Eco. Activity • Gov’t. Deficit/Surplus • Foreign Borrowers • Inflation/Deflation

  2. Factors Affecting Supply • Federal Reserve • Buy T-Bills – expand supply, interest rates down • Sell T-Bills – reduce supply, interest rates up. • Foreign Investors • Inflation/Deflation Fisher Effect: IN = IR + Inflation (expected)

  3. Index-linked bonds

  4. What are I Bonds? I Bonds are a new type of bond designed for investors seeking to protect the purchasing power of their investment and earn a guaranteed real rate of return. I Bonds are an accrual-type security--meaning interest is added to the bond monthly and paid when the bond is cashed. I Bonds are sold at face value--you pay $50 for a $50 bond--and they grow in value with inflation-indexed earnings for up to 30 years. See: www. libertybank.new/ibonds.html

  5. Homework: Forecast the 30-year bond rate on the last day of class.

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