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 in Figure 3A.
What determines the equilibrium relation between the two interest rates i s and
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 the unique volume of intermediation that is consist...
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