Monday, July 20, 2009

the interdependence of bank loan and deposit markets

our above discussion has considered the markets for loans and deposits in isolation from one another, for instance, our analysis of the loan market was predicated on the assumption that the deposit rate was equal to 0.07, even though we saw in our discussion of the deposit market that the equilibrium deposit rate can vary with changes in deposit market conditions. Likewise, our analysis of the deposit market assumed throughout that the loan rate was equal to 0.10, even though we saw in our discussion of the loan market that variations in loan market conditions can causes the equilibrium loan rate to change.
In fact, events that take place in the loan market influence events in the deposit market, and vice versa, it turns out that this interdependence between events in the loan and deposit markets helps explain why loan and deposit interest rates commonly (though not always) move in the same general direction over time.

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