Finance and the Economy · Seminar 8 · Macroeconomic factors

Less inventory, less borrowing, a lower interest rate

The interest rate is the price of borrowing. Firms that no longer need to finance large inventories demand fewer loanable funds, so the demand curve shifts left and the rate falls, which encourages other borrowers, such as firms investing in factories and equipment. Question 1, from Business Economics (Mankiw, Taylor & Ashwin, ch. 19).

Pick a scenario or slide the demand curve. The dashed grey line is the original demand curve; L₂ is what would be demanded at the old rate before the rate adjusts.
shift leftshift right

Interest rate

Funds lent

Demanded at the old rate

Why it matters for interest rates. Anything that changes how much firms, households or governments want to borrow, or how much savers want to lend, moves these curves and so moves the interest rate, even before the central bank does anything.

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