Buy custom Assumptions and conditions in the Arrow-Debreu Equilibrium model
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| Topic: |
Business
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| Number of pages / Number of words: |
3 / 699 |
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r = rL = rD
Coupon rate, deposit rate, and interest rate on bank loans have to be equal.
(notes) Securities market and banks are perfect substitutes for each other. Here, we have the assumptions.
?« If r > rD Deposit rate in bank is lower than interest rate paid on securities. Therefore, households will prefer buying bonds / securities markets than saving their money in bank...
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Therefore, households will prefer buying bonds / securities markets than saving their money in bank. If that condition happen, firms can?¦t borrow money from bank because there will be lack money supply in bank.
?« If r > rL . Shows that interest rate paid on securities is higher than interest rate of bank loan, therefore firms will choose to borrow money from banks than issuing bonds...
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General points of the essay
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