Key Concepts
1. Explain the Loanable Funds Theory by deriving demand and supply schedules for loanable funds.
2. Explain the Fisher Effect, and tie it in with Loanable Funds Theory by explaining how inflation
affects the demand and supply schedules for loanable funds.
3. Provide additional applications (especially current events) one at a time to help illustrate how events
can affect the demand and supply schedules, and therefore influence interest rates.
4. Explain how forecasts of interest rates are needed to make financial decisions, which require forecasts
of shifts in the demand and supply schedules for loanable funds.
5. Introduce several possible events simultaneously to illustrate how difficult it can be to forecast
interest rate movements when several events are occurring at once.
POINT/COUNTER-POINT:
Does a Large Fiscal Budget Deficit Result in Higher Interest Rates?
POINT: No. In some years (such as 2008), the fiscal budget deficit was large and interest rates were very
low.
COUNTER-POINT: Yes. When the federal government borrows large amounts of funds, it can crowd out
other potential borrowers, and the interest rates are bid up by the deficit units.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: A large budget deficit does not automatically cause high interest rates. However, it does result
in a large demand for funds, which will place upward pressure on interest rates unless there are offsetting
forces.