a. It looks like an entity can be both a source of loanable funds and a source o

Question

a. It looks like an entity can be both a source of loanable funds and a source of demand. How does that work?

b. When evaluating policies designed to affect interest rates or other financial variables, do we need to distinguish between the long-run effects and the short-run effects of the policy?

c. What does “interest” represent? Why is there so much angst over interest rates? How are you personally impacted in your daily lives by interest rates and what actions can you personally take to manage this impact?

Explanation / Answer

a. An entity can definitely be bot a source of loanable funds and a source of demand. An example of such an entity can be central bank of any country. It uses the supply and demand of loanable funds to carry out its monitory policy. It supplies by offerig loans to banks and demands by accepting deposits from the banks.

b. We must distinguish between long-run effects and short-run effects of the policies designed to affect interest rates. Any policy decision, which is specifically formed to affect short-term interest rates, will not affect long-run interest rates. For example, if Fed increases the interest rates for 3 months treasury bonds, it's very unlikely to have an impact on the Yield of 10-year treasury bond.

c. Interest represents the fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage. also called interest rate.

Many things in our day-to-day life is impacted by prevailing interest rates in the economy.

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