Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol


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T.Y.B.A. Economics Paper - IV - Advanced Economic Theory (Eng)

2
Dishoarding: 
Savings are supplemented by dishoarding. 
Dishoarding means to bring^ out hoarded money into use. The 
people may resort to dishoarding of idle cash balances which they 
might have held in the past. It happens when the desire for liquidity 
declines^ Dishoarding, therfore, adds to the supply of loanable 
funds. At a lower rate of interest, there is not enough of inducement 
to lend and, therefore, hoarding is encouraged. But as the rate of 
interest rises, people are encouraged to dishoard their idle cash 
balances. People may use, their cash balances themselves or may 
lend them to others. The schedule or curve dishoarding is positively 
sloped and is labelled DH in Fig. 4.10 
The rate of interest is determined at the point of intersection 
of the two curves
—the supply of loanable funds curve (SL) and the 
demand for loanable funds curve, DL. Fig. 4.10 shows that the 
equilibrium rate of interest is EM ; at this rate, the demand for 
loanable funds is equal to the supply of loanable funds i.e. OM. 
It may be noted that at the equilibrium rate of interest where 
aggregate demand for and supply of loanable funds are equal, 
planned savings and planned investment may not be equal.
In Fig. 4.10, at O r rate of interest, savings are equal to rA and 
planned investment equal to rB. Planned investment exceeds 
planned saving. Therefore, or can not be a stable rate of interest 
because income will increase to shift the supply schedule of paving 
SL and hence of loanable funds to the right. This will change the 
rate of interest. 
3. 
Bank Money: 
The banking system of a country is another source 
of the supply of loanable funds. The banks are factories of credit ; 
thy credit ; credit by giving loans to bussinesssmen and 
industrialists or by the purchase and sale of securities. By credit 
banks put new money in circulation and so increase the supply of 
loanable funds. It is natural that at higher rate of interest, banks 
lend more and less at lower rates. The supply curve of bank money 
also has a positive slope. The curve labelled BM in Fig.4.10 
indicates credit creation by banks. 

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