1. 1. What happened to the nominal interest rate in this
market?
2. Identify two possible causes of this
Interest
Supply
Rate
6%
5%
Demand
$1,200
$1,300
Loanable Funds

2. Real interest rate
• Easy just ….
• Real i = nominal i - CPI (or inflation rate)
• So in theory…..
• Nominal rate 3.5 %, CPI: 3.5%
OR
• Nominal rate 8.5 %, CPI: 10 %

3. Graph on the white “boards”
Market conditions change so business increase capital
spending
Fed buys $3 TRILLION worth of bonds during Open
Market Operation
Consumers spend 5%, but economy is at “full
employment”
Unemployment rate jumps from 6 % to 12%
US government deficit spends

4. Paradox of
thrift

6. Crowding out effect

15. Gov debt as a percent of GDP

16. Graph on page 571