The level of funds flow between suppliers and

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: (funds suppliers) and investors (funds demanders). The level of funds flow between suppliers and demanders can significantly affect economic growth. Growth results from the interaction of a variety of economic factors (such as the money supply, trade balances, and economic policies) that affect the cost of money—the interest rate or required return. The interest rate level acts as a regulating device that controls the flow of funds between suppliers and demanders. The Board of Governors of the Federal Reserve System regularly assesses economic conditions and, when necessary, initiates actions to raise or lower interest rates to control inflation and economic growth. Generally, the lower the interest rate, the greater the funds flow and therefore the greater the economic growth; the higher the interest rate, the lower the funds flow and economic growth. Interest Rate Fundamentals interest rate The compensation paid by the borrower of funds to the lender; from the borrower’s point of view, the cost of borrowing funds. required return The cost of funds obtained by selling an ownership interest; it reflects the funds supplier’s level of expected return. liquidity preferences General preferences of investors for shorter-term securities. real rate of interest The rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders are indifferent to the term of loans or investments and have no liquidity preference, and where all outcomes are certain. The interest rate or required return represents the cost of money. It is the compensation that a demander of funds must pay a supplier. When funds are lent, the cost of borrowing the funds is the interest rate. When funds are obtained by selling an ownership interest—as in the sale of stock—the cost to the issuer (demander) is commonly called the required return, which reflects the funds supplier’s level of expected retu...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online