Question

1. In chapter 7 of your macro text you learnt that the interest rate was determined by the demand and supply of loanable funds. In chapter 8 of your macro text you learnt that the interest rate was determined by the demand and supply of money. How can you reconcile these two different explanations?

Answer 1

They are one and only the same thing, the demand for money and the demand for the loanable fund is the same thing, when the demand for money increases, it increases in demand for money will always be in the form of extra demand for bonds that will be used in investment in the market,

if the supply of the loanable fund is increasing or the supply of money is increasing, it will be in form of people in the market dumping extra bonds in the market due to lower investment opportunities. so, bertween both the chapters its the bonds that is the missing link