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Some companies may respond to the higher stock prices by a fresh problem of stock to purchase new capital goods. It’s the role of financial markets to assist in such exchanges of money between and among households and firms. Suppose households were using income to purchase consumer goods and services and were conserving by using income to purchase corporate bonds. The firms are issuing and selling the corporate bonds to fund the purchase of capital goods.
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The households do not change their saving, and continue steadily to use the income to purchase consumer goods and services exactly as before, but then use their saved funds to buy corporate bonds rather, they accumulate larger money balances. This decrease in the demand for commercial bonds will lead to a lower price and a higher yield for them. The marketplace interest rate shall increase. Since saving has not changed, there has been no change in the natural interest rate.
Households save the same portion of income as before, they may be just saving by accumulating money rather than corporate and business bonds. The market interest rises above the natural interest. Suppose that instead the banking institutions expand the quantity of money by purchasing the same corporate bonds that the households would have purchased. The households continue steadily to spend the same amount of income on consumer services and goods as before. They save exactly as much as they were saving before. They save by accumulating money balances rather than purchasing corporate bonds. As the demand for corporate bonds by the households falls, that is strictly offset by the increase in the demand for corporate bonds by the banks.
The price of the bonds and their produces do not change. There is absolutely no change in the market interest rate. The firms sell the same corporate bonds as before, however they sell these to the banks than the households rather. The firms choose the identical capital goods as before. The firms selling the administrative center goods have the very same demand for resources, labor, and existing capital goods as before.
There is no change in comparative prices no change in the allocation of resources. There is no change in the framework of production between the production of goods of the lower order and goods of the higher orders. There is no change in the allocation of resources between your production of consumer goods for the nearer future and the creation of consumer goods for the more distant future.