CHAPTER 7

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CHAPTER 7

Interest Rates and Bond Prices


Compounding: The Future Value of Money Lent Today

Payment Today

$1,000

Future Value

1,060


Discounting: The Present Value of Money to Be Received in the Future

Value Today

$1,000

Future Payment

1,060


The Supply of and Demand for Funds

Interest Rate (Percent)

Loanable Funds (in Billions)

Demand

$500

E1

Supply

6


A Shift in the Demand for Funds



DD

$500

E1

SS

6

$600

8

D'D'

E2


A Shift in the Supply of Funds



DD

$500

E1

SS

6

4 E2

S'S'

$550


Inflation and Interest Rates: A Graphical Treatment



DD

$500

E1

SS

6

E2

S’S’

10

D'D'

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