Unformatted text preview: owers are able to finance additional current expenditure.
In this figure, LS schedule represents the supply of funding for intermediaries, the LD schedule is the loan demand
schedule, and these schedules are functions of two different interest rates. Hence the equilibrium level of lending L
can be at a point other than the one where the two schedules cross, as shown in Figure 3(a). ω is the spread between
i b and i s. Given the LS and LD curves we can determine the unique volume of intermediation that is consistent with
any given spread ω. This relation between the quantity of intermediated credit and the credit spread is graphed as
the curve XD in panel B, which we can think of as the “demand for intermediation.” The corresponding “supply of
intermediation” schedule XS indicates the credit spread required to induce financial institutions to intermediate a
certain volume of credit between savers and ultimate borrowers. Michael Woodford 31 their
their portfolios, so that in a competitive equilibrium, the rate i b at which they are
willing to lend (or the return that they will require on assets that they purchase) will
exceed their cos...
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