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1. What happened to the nominal interest rate in this market?
2. Identify two possible causes of this
Supply
Demand
InterestRate
Loanable Funds
5%
$1,200
6%
$1,300
Real interest rate• Easy just ….• Real i = nominal i - CPI (or inflation rate)
• So in theory…..• Nominal rate 3.5 %, CPI: 3.5% OR• Nominal rate 8.5 %, CPI: 10 %
Graph on the white “boards”
Market conditions change so business increase capital spending
Fed buys $3 TRILLION worth of bonds during Open Market Operation
Consumers spend 5%, but economy is at “full employment”
Unemployment rate jumps from 6 % to 12%US government deficit spends
Paradox of thrift
Crowding out effect
Gov debt as a percent of GDP
Graph on page 571
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