to think of an item (a piece of capital) that a firm could invest in to make profit. The purpose of this discussion is to help understand how the process of commercial banks making loans to firms increases the money supply. In the textbook it seems like the process of banks making loans and firms paying those loans back happens instantaneously. However, in reality that process takes time (several years). Typically, loans are re-paid over 10, 15, or even 30 years. The firms use profits from new business opportunities, opportunities they would not have had without the loan, to repay the bank over time.

• Describe a piece of capital a company might want to purchase by taking out a loan from a bank.
• Explain how having this new piece of capital would improve profits for the firm.
• How does the real interest rate impact the firm's decision to take out the loan?
• How does the corporate tax rate impact the firm's decision to take out the loan?