Unit 4.7 : The Loanable Funds Market

Real Interest Rate b/c it represents their real rate of return

What interest rate do borrowers and lenders focus on? Why?

bad for borrowers, good for lenders

Is a real interest of 50% good or bad?

loanable funds market

shows supply and demand of loans and shows equilibrium real interest rate

demand

inverse relationship between real interest rate and quantity loans demanded

supply

direct relationship between real interest rate and quantity loans demanded; NOT the same as money market...NOT VERTICAL

borrow; lend

At equilibrium, the real interest rate is the amount borrowers want to _____ equals the amount lenders want to _____

saving

what makes lending possible so supply of loanable funds is the amount of money *this*

private saving

amount households save instead of consume

public saving

amount the government saves instead of spends

national savings

public spending + private spending

capital inflow

amount of money entering the country

capital outflow

amount of money leaving the country

net capital inflow

inflow - outflow

supply

A change in net capital inflow will shift ____ of loanable funds

borrowing

demand of loanable funds

private investment

borrowing by businesses and consumer

government borrowing

deficit spending when the government spending is greater than tax revenue; ex. investment tax credits

change in borrowing by consumers, businesses (investment spending), and government (deficit spending)

Demand Shifters

changes in private savings behavior, public savings, and foreign investment (ex. more inflow of foreign financial capital)

Supply Shifters

borrowers/investors; lenders/savers

Demand for loans comes from ______ ; Supply for loans comes from _______

Demand decreases as worried consumers and businesses borrow/invest less. Supply decreases as worried foreigners take money out of country ("capital flight")

What will happen to demand and supply if there's political instability?

capital flight

when foreigners take money out of country

deficit spending

when government spending exceeds its revenue

public savings and supply of loanable funds decrease; shift supply left

What will happen if the government increases deficit spending?