If the funding supply curve ls and the loan demand

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Unformatted text preview: ent with any given spread ω between i b and i s. If the funding supply curve LS and the loan demand curve LD If have the slopes shown, then a larger credit spread ω implies a lower equilibrium volume of intermediated credit L. This relation between the quantity of intermediated ated credit and the credit spread is graphed as the curve XD in Figure 3B, which we can can think of as the “demand for intermediation.” The The demand for intermediation schedule XD indicates the degree to which borrowers are willing to pay an interest rate higher than the one required in order to to induce savers to supply funds to finance someone else’s expenditure. This represents sents a profit opportunity for intermediaries, to the extent that they are able to arrange for the transfer of funds at sufficiently low cost. The volume of lending that actually occurs, though, will also depend on the capacity of the financial sector to supply supply this service at a margin low enough for the services to be demanded. The The corresponding “supply of intermediation” schedule, indicating the credit spread required to induce financial institutions to intermediate a certain volume of credit between savers and ul...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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