Re: poly: Why interest rates may stay low

Let me correct my diagram based on Robin's comments. This makes a lot
more sense now (got rid of the tabs, sorry):

  I
  
  N 5% | D
     R | DD
  T 4% | DD
     A | DD
  E 3% | DDD SSSSSSSSSSSSS
     T | SSSSSSSSSSSSSSSS**SSSSSSSSSSSSSS
  R 2% | SSSS DDDD
     E |S DDDD
  E 1% | DDDDD
     S |
  S |--------------------------------------------------
       
  T M O N E Y

So the point of the flat supply curve is that the amount offered for
investment is very sensitive to interest rates, a small increase in
rates making much more money available. Therefore, unless demand for
loans increases tremendously, interest rates can't go up much. The fact
that historical rates stayed in a narrow range suggests that the curve
has this shape.

I still don't understand one comment:

> >So, what ends up happening to the demand curve? Does it stay the same?
> >If so, what did it matter what the shape of the supply curve was?
>
> The demand curve gets "burned" off, so it's flat up to the price point.

What does that mean, "burned off"? Is my demand curve plausible above?
Should it be flatter, in some sense?

Thanks,

Hal
Received on Fri Feb 27 23:57:34 1998