ABSTRACT
The credit (CR) market is the third and final sector in the macroeconomic trinity. This chapter explains the important difference between the real and nominal cost of credit, how real credit costs are determined, and why they change. The cost of credit comes in two major forms, nominal and real. The real cost of credit is the percent by which lenders' actual purchasing power increases and borrowers' purchasing power decreases when a debt is repaid. Credit is demanded when households, businesses, governments, and foreign residents borrow. Foreigners supply credit when they invest financially in international CR markets and central banks supply funds when they create new money. Real credit demand is also affected by consumers, mainly those wishing to purchase homes and durable goods, such as automobiles, home appliances, and furniture. If real gross domestic product (RGDP) rises, household incomes and business profits increase, causing saving to grow and, with it, the supply of real credit.
