The green line indicates that lower interest rates encourage higher fixed investment We borrow when rates seems low. The yellow shows the combinations of interest rates and levels of real income for which money supply equals money demand—that is, for which the money market is in equilibrium.
Lets try thing in a context. The borrower wants a new washing machine. The lender will lend the money. If the interest rate is high , the more money the lender sets aside for consumer financing. At some interest rate the lender and borrower agree.
The reason I get this confused is that I mix this up with supply and demand, which computes price. This is the supply and demand for money, but works the same. I confused myself because I started out with interest rates as being an outcome of the volatility in the flow of goods, I never did the static model. It bugs me to use interest rates as the price of something, because it is the price of renting, not owning.
Does it matter, owning vs renting? Yes, this chart is for one rate over on the rental period only. So this chart is based under the assumption that the yield curve is a single horizontal line, an average of the real yield curve. In all the years of trying to make this explain a flow norm, I never get anywhere, mainly because I never got how static the model is.
1 comment:
Simple but very accurate information… Thanks for sharing this one.
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