Embedded Files
You are expected to explain/analyze (AO2) the difference between real and nominal interest rates (SL/HL), and explain/analyze + draw (AO2 + AO4) the determination of equilibrium interest rates (HL)
Real vs. Nominal Interest Rates (AO2)
Real vs. Nominal Interest Rates (AO2)
Nominal Interest Rate: The actual interest rate of a loan, regardless of inflation.
Real Interest Rate: The interest rate of a loan adjusted to the inflation rate.
Real Interest Rate = Nominal Interest Rate - Inflation
This means that in times of high inflation, there might be a negative real interest rate: The borrower pays interest, but it is lower than the inflation rate so the bank loses the real value of the loan.
The following section is for Higher Level students only.
Demand and Supply of Money - Equilibrium Interest Rates (HL) (AO2 + AO4)
Demand and Supply of Money - Equilibrium Interest Rates (HL) (AO2 + AO4)
The equilibrium interest rate diagram is just like any other market, with the exception that supply is a vertical line. This is because unlike goods and services, the market will not supply more money in times of high demand. The diagram consists of:
Demand of money: The total demand of money meant for spending
Supply of money: The total amount of money in circulation in an economy
Interest Rate on the y-axis
Quantity of Money on the x-axis
However, both S and D can still change.
Shift in Supply of Money: If the central bank uses one of its tools for expanding the economy (expansionary monetary policy), the supply will shift to the right, as there will be more money in circulation. This lowers interest rates.
Shift in Demand of Money: If one of AD's components increases, there will be a general increase in the demand for money. This increases interest rates.
Expansionary Monetary Policy
Contractionary Monetary Policy
More Demand for Money
Less Demand for Money
Google Sites
Report abuse