A macroeconomic Theory of the Open Economy, Supply and demand for Essay

A macroeconomic Theory of the Open Economy, Supply and demand for Loanable Funds and for Foreign-Currency Exchange - Essay Example To balance the condition and allow the exchange, there is demand for the funds by the borrowers when they sell the bond that they have to the savers. An exchange in any market can only occur if there are demanders and suppliers. The funds consist of the loans from the banks and savings saved by the consumers foregoing consumption. Therefore to save involves a sacrifice and the savers in exchange demand for compensation for the best alternative foregone had they consumed the funds instead of saving them. The concept of compensation and incurring a cost is, therefore, is very important for the sustainability of the funds market (McConnell, Campbell, Brue and Stanley 92). The loanable funds are usually used for investment in new capital goods bringing about the concept of the supply and demand for the funds. The lenders bring about the supply curve that is upward sloping from left to right while the borrowers bring about the demand curve that is downward sloping from the left to the right. The curves are guided by the principle of demand and supply which states that, supply increases with the increase in the price while demand increases with a decrease in price. The conflicting ideologies calls for an equilibrium where the two intersect and those to make a decision agree. The interest rate is the sacrifice or cost of borrowing the loanable funds from the suppliers and it is the value of money that a person pays for using the dollar for one year. It is also the benefit or compensation to the person or entity supplying the funds. The rate of interest is usually expressed as a percentage of annual funds spend or borrowed. When dealing with the loanable funds one considers the interest rate which is adjusted for inflation to take care of the price changes. It is essential to ponder on the rate of interest that is real than a nominal one that has