【正文】 Money and Capital Markets 5 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose McGraw Hill / Irwin Slides by YeeTien (Ted) Fu The Determinants of Interest Rates: Competing Ideas ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 2 ? Learning Objectives ? ? To understand the important roles and functions that interest rates perform within the economy and the financial system. ? To explore the most important ideas about the determinants of interest rates and asset prices. ? To identify the key forces that economists believe set market interest rates and asset prices into motion. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 3 Introduction ? The acts of saving and lending, and borrowing and investing, are significantly influenced by and tied together by the interest rate. ? The interest rate is the price a borrower must pay to secure scarce loanable funds from a lender for an agreedupon time period. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 4 Functions of the Interest Rate in the Economy ? The interest rate helps guarantee that current savings will flow into investment to promote economic growth. ? It rations the available supply of credit, generally providing loanable funds to those investment projects with the highest return. ? It brings the supply of money into balance with the public’s demand for money. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 5 Functions of the Interest Rate in the Economy ? The interest rate serves as an important tool for government policy through its influence on the volume of savings and investment. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 6 The Classical Theory of Interest Rates ? The classical theory argues that the rate of interest is determined by two forces: ? the supply of savings, derived mainly from households, and ? the demand for investment capital, ing mainly from the business sector. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 7 The Classical Theory of Interest Rates Household Savings ? Current household savings equal the difference between current ine and current consumption expenditures. ? Individuals prefer current over future consumption, and the payment of interest is a reward for waiting. ? Higher interest rates encourage the substitution of current saving for current consumption. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 8 The Classical Theory of Interest Rates The Substitution Effect Relating Savings and Interest Rates Interest Rate Current Saving ? r1 S1 ? r2 S2 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 9 The Classical Theory of Interest Rates Business and Government Savings ? Most businesses hold savings balances in the form of retained earnings, the amount of which is determined principally by business profits, and to a lesser extent, by interest rates. ? Ine flows in the economy and the pacing of government spending programs are the dominant factors affecting government savings (budget surplus). ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 10 The Classical Theory of Interest Rates The Demand for Investment Funds ? Gross business investment equals the sum of replacement investment and investment. ? The investment decisionmaking process typically involves the calculation of a project’s expected internal rate of return, and the parison of that expected return with the anticipated returns of alternative projects, as well as with market interest rates. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 11 The Classical Theory of Interest Rates The Cost of Capital and the Investment Decision A 15% B 12% C 10% D 8% E 7% Dollar Cost of Investment Projects Expected Internal Rates of Return on Alternative Investment Projects Cost of Capital Funds = 10% – acceptable – acceptable – indifferent unprofitable unprofitable ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 12 The Classical Theory of Interest Rates The Investment Demand Schedule In the Classical Theory of Interest Rates ? r2 Interest Rate Investment Spending ? r1 I1 I2 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 13 The Classical Theory of Interest Rates The Equilibrium Rate of Interest In the Classical Theory of Interest Rates Interest Rate Savings amp。 Investment rE QE ? Investment Savings ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 14 The Classical Theory of Interest Rates Limitations ? Factors other than savings and investment that affect interest rates are ignored. For example, many financial institutions can “create” money today by making loans to the public. ? Today, economists recognize that ine is more important than interest rates in determining the volume of savings. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 5 15 The Classical