Nick Scannell
Paper 2
In “Principle of Macroeconomics”, Case, Fair, and Oster present their intellectual studies of macroeconomics to produce better economy for the future. In pursuit of doing so, they are spill their knowledge out about the money demand and equilibrium interest rate, aggregate demand in the goods and money market, aggregate supply and the equilibrium price level, the labor market in the macroeconomy, and the financial crisis, stabilization, and deficits within the economy. All of these subjects are a crucial part of macroeconomics and our economy today. By taking these subjects and applying them to your life, you could make a substantial difference, help heal the economy and keep it stabilized so that the economy close to equilibrium as possible.
Money Demand and the Equilibrium Interest Rate, Chapter 11, focuses mainly on how the interest rate is determined and how the Federal Reserve affects the interest rate through the feds ability to change money supply. Interest is defined as the fee that is paid back to lenders for a use of a fund from the person who borrowed it. When the government needs to borrow funds they issue bonds and in return the lender receives the money back in a period of time (interest).
Loans can be a little different in the way that when a person asks for a loan from a bank, they ask for you to put down a certain amount of interest so they know that you will follow up on your word to pay them back. By the end of the period, you must pay them back the amount they gave to you in addition to the interest they asked for at the beginning. So you will end up paying a little more than how much you borrowed. So if you borrowed one thousand dollars ($1,000) and ask if you can have one year to pay it off, they will ask you to put down one hundred dollars ($100) of interest (ten percent) or more. At the end of the year you will have to pay back the one thousand dollars in addition to the interest you already gave them so the total is one thousand one hundred dollars ($1,100).
Bonds are considered complicated loans because they have several properties; the face value, maturity date, and a coupon payment. The face value of a bond is the nominal dollar amount assigned to a security by the issuer and is usually in denominations of one thousand dollars ($1,000). The maturity date is the date in which the lender receives the full amount of money back from the borrower. The coupon payment is a fixed payment of a specific amount that is owed to the bond holder every year. So on January 2, 2011 company XYZ issues a bond and in the bond market it was determined to have a face value of one thousand ($1,000), a maturity date of 15 years and a coupon payment of one hundred dollars ($100) per year which is 10 percent investment of the investment (interest rate= interest/bond price) . The lender would give the borrower a check/payment for one thousand and in return would get a check of one hundred dollars every January for the next 14 years. When January 2, 2026 XYZ would send that lender a check of one thousand dollars in addition to the last coupon payment. If the market determined that the face value of the bond was only nine hundred dollars ($900), the interest rate would be larger than 10 percent because bond prices and interest rate are inversely related. So if the investment is one hundred dollars and the face value dropped to nine hundred dollars the percentage would increase to 11.1 percent (interest/bond price=$100/$900=1/9= 11.1%). In a way this shows us that interest rate is indirectly determined by the bond market and the only way to figure out the interest rate is by calculating the face value, maturity date and its coupon price.
The demand for money depends negatively on interest rate and is determined by the amount of interest rate that is given. When the interest rate is higher, the amount of money people will want to hold will decrease because opportunity cost is