David M. Harrison, Ph.D.

1
Interest Rate Determination

• Classical Theory
• Marginal Efficiency of Capital (MEI)
• Supply of Funds

2
Interest Rate Determination

• Classical Theory (cont.)
• Market Equilibrium
• Disequilibrium Conditions

3
Interest Rate Determination

• Limitation of the Classical Theory
• Loanable Funds Approach

4
Interest Rate Determination

• Demandors of Funds
• Suppliers of Funds

5
Interest Rate Determination

• Loanable Funds Examples

6
The Monetarist View of Interest Rates

• The Old Quantity Theory
• The Classical Quantity Theory

7
The Monetarist View of Interest Rates

• The Modern Quantity Theory
• Changes in the Money Supply have 3 effects

8
Neo-Keynesian Model

• Interest rates are dependent upon
• Transaction Demand
• Speculative Demand
• Examples
• Increasing the money supply ?
• Decreasing the money supply ?

9
Sources of Risk

• Risks Associated with Mortgage Investing