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Then it becomes necessary to distinguish between the

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Unformatted text preview: re financial claims on) the ultimate borrowers. Then, it becomes necessary to distinguish between the interest rate i s (the rate paid to savers) at which intermediaries are able to fund themselves and the interest rate i b (the borrowing or loan rate) at which ultimate borrowers are able to finance additional current expenditure. We can still think in terms of the two schedules shown in Figure 2A, but now the LS schedule represents the supply of funding for intermediaries rather than the supply of loans to ultimate borrowers, and we must now recognize that the supply of funding and the demand for loans 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 shown in Figure 3A. What What determines the equilibrium relation between the two interest rates i s and b i ? Given the funding supply and loan demand curves (which means, given the values of a set of variables that include the current value of income Y ), we can deter), mine mine the unique volume of intermediation that is consist...
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