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Explain and graphically illustrate the two models of interest rate determination. What factors may cause shifts...

Explain and graphically illustrate the two models of interest rate determination. What factors may cause shifts in the curves in the above models?

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Answer #1

a) Liquidity prefernce model

The interest rate is governened by interesection of money demand and money supply (given) curve.

b)loanable funds model

The interest rate is governened by interesection of demand fo loanable funds and supply of loanable funds curve.

An increase in money supply , shifts the money supply curve in model a)

An increase in real gdp or savings shifts the supply curve in model b)

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