Macroeconomics, 2nd Edition by Pearson

388

MACROECONOMICS

Let the marginal cost of acquiring funds be

i

mc

15

for the bank lender. From

this we deduct the country-level systemic risk premium

i

sr

representing the

premium accounting for deficiencies in contractual and informational frame-

works and macroeconomic uncertainty, to get the floor to the expected return

to the bank when lending

r

mc

=

i

mc

-

i

sr

. Next we introduce agency issues. This

results in a nonlinear wedge between the 45-degree dashed line and the inverted



-shaped curve labelled

LF

. That implies that as the lending interest rate

i

rises,

the expected return to the bank rises with ...